It’s an approach designed to ensure that business aircraft owners really do have the perfect ownership experience. “We lead with that as a culture and a mantra,” said McReynolds of the MRO business. “We tell them [owners] what it’s [their aircraft] going to look like going out of the door [after aircraft maintenance]. And we tell them about surprises when they happen. It’s an expectation they really appreciate.”

Often aircraft maintenance is one of the last things new owners think about when closing a transaction. But, in reality, it’s one of the most important parts of the ownership experience, which often becomes an afterthought, said McReynolds of Weststar Aviation. “The complexity in this thing we call maintenance; most people don’t think about. But hiring a DoM [director of maintenance] to represent your best interest in a complex environment is a key part of ownership,” he added.

‘All on the first day’

Buying a business aircraft is a collaborative effort, according to speakers. Jay Mesinger, CEO/president, Mesinger Jet Sales, which sponsored the Town Hall had this advice for new buyers: “I tell people when they start to think about buying to talk to their lender, interview [prospective] management companies and your aviation attorney – all on the first day They are all parallel paths that you need to come together at one time to enjoy your asset from Day One.”

So much of the industry’s focus lies on the transactional side – the buying and selling. “But there’s so much that goes on in the middle and that is the ownership,” he added. “Operating your airplane is all part of getting ready to, one day, sell it and buy another one. But let’s not forget this place in the middle where the joy can come in.”

Welcoming new entrants to this industry effectively depended on understanding the perspective of where they come from, said Bob Marinace, chief experience officer with private jet charter and management company Solairus Aviation. 

Those who come from fractional and charter “know the acronyms” and the basics of scheduling and using an aircraft but they don’t understand the ownership experience, said Marinace. “What we are about is to help educate and to explain how this will differ from what they have experienced so far,” he added.

‘One of the first things you talk about’

Too often the selection of a management company is not prioritised, said Stewart Lapayowker, managing shareholder, Lapayowker Jet Counsel. “Unfortunately, for new aircraft owners, selection of a management company seemed to get overlooked and then it’s a scramble to fine one,” said Lapayowker. “But it should be one of the first things you talk about.”

Some of the key questions to answer, he said, are: Are you going to set up your own organic flight department; are you going to have a managed aircraft and if so, who will be the manager? It is important to engage a management company that understands the new owner’s preferred structure and can be flexible and deliver the services they are looking for.

“First-time buyers haven’t got the experience [to make informed decisions on their own],” said Lapayowker. “But they get a lot of free advice. Everybody at a cocktail party tells you how to do it right.”

You can watch the hour-long, free-to-view CJI Town Hall, Masterclass here. The next Masterclass – devoted to buying business aircraft – aganin sponsored by Mesinger Jet Sales, will take place on Wednesday, September 25th. These Town Halls complement CJI’s Aircraft Transaction Masterclass.

The post CJI Town Hall, Masterclass: ‘Safety, quality, honesty and transparency’ appeared first on Corporate Jet Investor.

He traces its origins to how new owners shaped the business jet market during the onset of Covid. The storm’s outcome may leave some struggling to recoup the value of their initial investment.

“At the onset of Covid, many factors collided to create the perfect opportunity for first-time buyers to enter the market,” Foster tells CJI. “Now, these same factors are creating a perfect storm, which potentially could prove disastrous to these same owners.”

Business aviation caught fire over the last two quarters of 2020, driven by the desire to travel but not via public transportation. Charter and fractional providers enjoyed this early burst. “The fractional segment sold right through their lift capacity but were contractually bound to still provide lift – so they turned to the charter market for supplemental lift,” explains Foster. “Now the charter market held a captive client (fractional) over a barrel. So, with unprecedented high demand, hourly prices sky-rocketed to two-or-three times pre-pandemic levels.”

Consequently, by the end of 2020, fractionals were largely sold-out and charter prices reached the “point of insanity” – again fuelled by both fractional contractual need and demand, he explains.

‘Point of insanity’

That prompted non-owners to turn to whole aircraft ownership. For many, this seemed the perfect opportunity. Market conditions created from the onset of Covid included “free” capital from government stimulus programmes, significant gains in equity markets and a desire to travel to new vacation homes and remote work destinations – but not via the airlines.

Further incentive was supplied by bonus depreciation and historically low interest rates. “Finally, there was the promise (or lie) from some management/charter companies they can fly enough charter to ‘make the plane pay for itself’,” Foster says.  All combined, the “perfect storm” was formed and first-time buyers raced to the market to purchase an aircraft.

Before the pandemic, the average market supply generally hovered around 10-12% of fleet, or roughly 2,500-3,000 aircraft available at any time. By mid-2022, market supply settled in at 3-4%, with some modern models seeing available supply at less than 1% – perhaps even just one unit available. Predictably, with low supply, prices surged – prompting many legacy models to move upwards of two to three times their pre-pandemic values.

“But the worst part (for these buyers) is the transaction pace changed to unimaginably short time frames,” says Foster. “Aircraft were transacted in a matter of days with little or no due diligence on the aircraft, its valuation, nor parties involved and a lot of bad behaviours by brokers/middlemen.”

The perfect storm

This year that perfect opportunity looks like heading towards the perfect storm, according to Foster. Here’s how the storm is building: while overall supply sits at only 6% or about half the pre-pandemic level, total supply is already two to three times the level in mid-2022.

Charter demand is also down significantly. “The promise (made by some) has now become a lie. Owners are not able to create significant returns by chartering and many are realising that fixed and variable costs are much higher than originally budgeted or sold to them, exacerbated by significantly higher crew salaries, supply chain issues, etc. Finally, with rising supply, slowing pace, and far less demand, prices are falling.”

Legacy aircraft hold the greatest exposure due first, to the rapid rise in values that are already retreating quickly. The second reason is the “almost complete lack of sophistication” of buyers and limited or no due diligence completed at the time of purchase. “These owners will face significant exposure when they elect to sell, and the buyer demands a typical pre-purchase inspection.”

What might happen

But it gets worse (in terms of what might happen). “A large majority of these first-time buyers financed 90-100% of their purchase and also took 100% bonus depreciation,” Foster, from OGARAJETS tells us. “For easy math, let’s say the principal reduction on a $5,000,000 at 18 months is $500,000 or $4,500,000 balance – but the aircraft is only worth $3,500,000 today – less than 30% [of its previous value].

“Plus, the seller will have to stand behind the airworthiness and corrective actions arising from the buyer inspection. So, perhaps the seller nets $3,200,000, which requires them to write a check at closing for $1,300,000.”

Then, worse again. Many first-time buyers depreciated the aircraft to $0 in year one which offset other gains in the purchase year. “Now they must recapture this loss as ordinary income. The simple math is $3,5000,000 at 40% or a $1,400,000 tax bill.”

All of this raises the uncomfortable question: how many of these owners can afford to sell their perfect opportunity aircraft? Also, delaying the sale only exacerbates the challenge. Prices will continue to fall on these legacy platforms, while maintenance will continue to accrue. “Potentially, this is not a pretty picture,” says Foster.

But what do you think? Is the outlook sunnier? Or are the storm clouds gathering for new entrant aircraft sales? Please let us know.

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