Value vs Value Retention
It’s not what you pay for it, it’s the difference between what you paid for it and what you sell it for years later…
When a new client hires our firm to represent them in the purchase of an aircraft, one of the first questions is “What is important to you in an airplane?” As you can imagine, the answers are as varied as the types of aircraft in the world, or maybe even the types of people in the world who fly them. The one answer we never hear is value retention. It is true that some people will say “I want an airplane that is a good deal,” but what they are thinking is that they want to pay less for a particular aircraft than the last guy paid for a similar machine. The lowest price and the best deal are usually not the same thing.
“IT’S NOT WHAT YOU PAY FOR IT, IT’S THE DIFFERENCE BETWEEN WHAT YOU PAID FOR IT AND WHAT YOU SELL IT FOR YEARS LATER”
I’ve been making this statement for the last 15 years and it is more true now than ever. After several years of aircraft values trending upwards, they fell sharply in the 2008 crash, and while there has been recovery of lost value on most models, the overall trend since then has been down. I wish I could say I expect that to change, but I don’t. Does this mean that you shouldn’t purchase an aircraft? Not at all. It just means that buying an airplane is a large investment, and you should be a wise investor.
In the years since 2008 a new reality has emerged. Values are more predictable than before, but for most make and models, that is not good news. The view of aircraft values changed from a generally positive one to a generally pessimistic one. Here’s a great example: In the summer of 2005 an airplane that was priced below the competition and still had 600 hours remaining until engine overhauls were due would sell quickly. I still remember hearing “Price sells! If it’s cheap, they’ll buy it!” Fast-forward to 2017, and the same airplane is going to sit and may only sell when the desperate owner drops the price low enough to allow the new owner to pay for the engine overhauls! What about the 1200 combined hours of engine time remaining? Basically worthless… In today’s reality, the airplane is all too often considered “run-out,” and the value is severely diminished. The same is true for many aircraft that are expected to have engine programs. Even if the engine times are reasonably good, the value will be greatly impacted if the airplane is not on an engine program.
Is there GOOD news?
Yes! There is great news! The fact is, aircraft market values are more predictable than they have been in the past. It’s complicated, and you must consider numerous factors, but we are buying aircraft that will retain their value and sell at the top of the market when they are sold. We are having fun and our clients are getting good deals. Not just good prices, but good deals! I am excited about the purchases we are making for our clients and I am more concerned than ever for those buyers who choose to go it alone. There’s a lot of opportunity today, but as always, that includes the opportunity to make a decision without enough information, a decision that could prove very costly in the future.
The market crash, airframe age, engine and airframe times… all of these factors affect value, but how does that relate to value retention?
It’s simple. Value retention is that difference between what you pay for it and what it eventually sells for. To determine your probable value retention you have to project what the aircraft’s times, condition and market value will be in the future. The airplane that has just past mid-time motors today will likely fly 300–400 hours per year and be considered “run-out” in three years. The idea of spending $300k–$500k more for an airplane with fresh motors looks pretty good compared to an $800k–$1.2M deduct in the near future.
We all know that a 1989 Citation V is only one year older than a 1990… but consider the real world values and you will find that there’s a loss of value that isn’t properly accounted for in VREF or Aircraft Blue Book. (I’ll cover the problems associated with relying on either of these resources to determine an aircraft’s value in another blog). So, you may be thinking, “What’s the big deal? As long as I get a good deal on an ’89 it doesn’t matter right?” The answer is, it depends. You have to ask yourself how the average buyer will perceive “1989” when it is the year 2020! (If you are my age that little thought process was painful!)
How much it costs to own and operate an aircraft is of critical importance, and it is impossible to accurately determine what any of these costs will be unless you know how much the airplane itself costs. The cost of the airplane is NOT the price of the airplane. The actual cost of the airplane is the difference between the total amount you have invested in it, including purchase price and improvements, and the amount of money you are able to sell it for.
A newer aircraft may hold its value better, have a lower direct operating cost, and, even considering the cost of the capital invested, cost less to own than an older one.
An older aircraft may have an acquisition cost low enough that the savings in capital cost and the fact that there is simply very little room for the value to drop may offset the higher maintenance cost and greater fuel burn, not to mention freeing up capital for other projects.
It’s a complex process with many decisions to be made. Call us today and find out more about the benefits of using an acquisition specialist to help you purchase a turbine aircraft.
Jet Acquisitions – We Work for Buyers.
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