The Duncan Download Blog: Business Aviation Advice & Observations

Contributed by Bob McCammon, Aircraft Sales Rep and David Linscomb, Records and Research Team Leader

This Global Express is currently available for sale. For a complete listing, visit www.DuncanAviation.aero/
aircraftsales

Now that you’ve made the decision to sell your aircraft, don’t overlook a very important step – pre-purchase documentation. Well before the pre-purchase evaluation; make your first thorough inspection be of your aircraft’s logbooks. The more organized, complete and comprehensive, the easier the process and the more value they bring to the aircraft.

Organized, Complete and Up-to-Date

The airframe and engine log books should be complete, original and consecutive with all 8130s, 337s, etc. organized and accounted for. All Airworthy Directives and Mandatory Service Bulletins should be current; required maintenance, including life limited components, up to date.

The best way to verify all major components match what is recorded in the log books is to do a physical audit of your aircraft. Your aircraft should be on some type of maintenance tracking program, like Duncan Aviation’s Tracker. And if on Camp make sure all cards are well organized, and that the latest status report is current.

Logbook Audit

To take this a step further, you can have an audit of your aircraft’s records performed by an independent third party, preferably a factory authorized service center for the model of aircraft you operate. A detailed report showing any discrepancies in your maintenance documentation is typically provided. These discrepancies can be corrected early on in the process.

If present, a records audit can uncover indications of previous damage to the aircraft or any major alterations or repairs that may not be significant to the seller but could be a deterrent to the buyer. Time and time again, this kind of evidence is a showstopper during a business aircraft sales transaction. In numerous cases, a thorough review has shown an incident the current owner was not aware of; that happened before they purchased the aircraft but was no caught during the previous pre-purchase evaluation. By finding these incidents early, a through explanation can be made to a potential buyer.

If it is not convenient for you to get your business aircraft’s logbooks and records to a third-party facility, Duncan Aviation can send representatives to your facility to perform a thorough logbook audit on-site.  

When your business aircraft enters a pre-purchase inspection, a complete records review is typically performed at the request of the buyer. By being pro-active, steps can be eliminated and unforeseen problems can be rectified before the pre-purchase inspection begins. Regrettably, a records review is usually not done until the aircraft arrives at the pre-purchase inspection facility where it is not uncommon for surprises to surface.

This records review early in the process will help insure a smooth transaction and streamline the selling process. Your broker can also provide a copy of the records research to potential prospects.

Duncan Aviation Aircraft Sales representatives have facilitated many buyers and sellers through the pre-purchase evaluation. They understand the impact a logbook can have when valuing a business aircraft in the secondary market. If you are considering putting your business aircraft up for sale and have questions about the current state of the logbooks, contact the Duncan Aviation Aircraft Sales & Acquisitions team. 

Bob McCammon is an Aircraft Sales and Acquisitions Rep. at Duncan Aviation’s Lincoln, Nebraska facility, specializing in turbine and turbo-prop aircraft. He began working in aviation in 1968

David Linscomb is the Records & Research Team Leader located at Duncan Aviation's Lincoln, Nebraska, facility, specializing in Chapter 4 & Chapter 5 requirements on the latest information coming from the Original Equipment Manufacturers (OEMs) or the FAA. His aviation career began in 1984.

Contributed by Doug Kvassay, Aircraft Sales Representative

In a previous blog posts, I discussed how the depreciated value of a business aircraft compares to its market value over time and that there is usually a difference between these two values. The depreciated value is the worth of an aircraft based upon a predetermined depreciation schedule over the entire life-cycle of the aircraft until retirement.

Bank Lending Practices During Economic Swings

During times of economic prosperity, aircraft trade for far more than their estimated depreciated value. This is when banks are comfortable lending 90 to 100% of the aircraft’s current market value on an asset-based only loan, with longer than normal terms.

Conversely, when the economy has contracted resulting in a recession, aircraft market values fall below their depreciated value and banks become extremely restrictive when making new loans. While considering new loan parameters in this adverse environment, banks are haunted by the declining values of the assets backing their current loan portfolio. Now banks want shorter terms, larger down payments, and more collateral, sometimes beyond the asset itself.

These lending practices have banks lending too much money when asset values are inflated and restrict lending when there is little risk of further asset devaluation. This is actually the opposite of what the banks should be doing. I credit much of this problem to the current valuation process when making loans.

Current Business Aircraft Valuation Process

In order to get “current” market values for business aircraft, banks pull numbers from one or both aircraft pricing guides (Vref Aircraft Value Price Reference & Aircraft Bluebook Price Digest) and then may hire an “outside expert” to validate the numbers in these guides. Their due diligence for valuation is based solely on the last three months of pricing data. However, this information provides little insight into what an aircraft should be valued at when looking at the larger picture of values over the asset's entire life cycle.

A bank should consider the lifetime values of an aircraft. For example, when the aircraft is trading for $7 mil, but the depreciation model shows it to be a $5 mil asset, as the graph for a 1998 Citation Excel shows, banks should require a larger down payment, shorter loan terms and more collateral. This tightening of credit terms would dampen the rapid price inflation we have seen in the past.

Likewise, in a downturn, when the asset is selling for less than $3 mil, but its depreciated value is closer to $4 mil, the banks could loosen loan requirements, providing more liquidity to the market and help drive prices up to where they should be.

If the major banks followed these reversed loan policies, we would see less volatility in aircraft prices and in the collateral backing up their loans. There will always be the financing institutions that will continue to follow current policies, but when the economy turns, as it always does, they will be burdened as many banks are today and many smaller institutions will fall to the wayside.

Duncan Aviation has helped clients buy and sell aircraft since 1956, and has facilitated more than 3,000 transactions in several different countries. For the latest aircraft sales listings, visit www.DuncanAviation.aero/aircraftsales.

Doug Kvassay is a part of a team of four Aircraft Sales Representatives. He specializes in advanced aircraft aftermarket analysis and managing complex transactions. His aviation career began in 1980.

Contributed by Bob McCammon, Aircraft Sales Rep

The first quarter analysis gives all indications that the business aircraft secondary market is improving. More buyers with a true need for business aircraft are entering the market as opposed to those who have been purchasing simply because prices have been low.

First Quarter Sale Transactions

The market for late-model large-body aircraft has seen few transactions, while at the same time the light and mid-sized business aircraft have increased considerably. This is likely attributed to serious buyers exploring several markets for the best deals. Many markets have been depleted of quality domestic aircraft, leaving foreign aircraft available.

Available pre-2000 era aircraft continues to increase with few buyers, while prices of 1990 and older aircraft continue to decline with very little market activity.

Looking Ahead

The beginning of 2012 is substantially better than 2010 and is showing impressive improvement over 2011. We anticipate that the remainder of the year will continue to improve, with a firm rebound expected in 2013.

At Duncan Aviation’s Aircraft Sales & Acquisitions, we continue to expand our knowledge of the pre-owned aircraft market on a daily basis, assessing overall market strengths and weaknesses and determining numbers to evaluate pricing.

Choose the better way to buy or sell aircraft. Contact a member of the Duncan Aviation Aircraft Sales team today.

Bob McCammon is an Aircraft Sales and Acquisitions Rep. at Duncan Aviation’s Lincoln, Nebraska facility, specializing in turbine and turbo-prop aircraft. He began working in aviation in 1968.

Contributed by Doug Kvassay, Aircraft Sales Representative

An example of a 40-year life depreciation schedule for a 1981 Westwind 1.

There is a general school of thought that the value of a business aircraft, once purchased, will remain relatively flat over time because it is maintained at a higher standard than most other capital investments; believing the investment in major equipment upgrades and maintenance will slow the business aircraft depreciation process. However, we have all seen prices increase dramatically in good times and fall far below expectations when the economy slows.

For example, in 2010, we had a 1981 Westwind 1 available for sale. This 30-year old aircraft was outstanding. Over the course of the previous 17 years, it had been well-maintained, as well as repainted and refurbished by Duncan Aviation. Prior to the last recession in 2008, we would have placed the value of this aircraft in the $1.6 to $1.8 million range. However, as with all aircraft in a recession, the value was deflated and we were faced with an aircraft that would need to be priced in the neighborhood of $750,000 to be competitive.

At the same time the owner thought he was giving the aircraft away, the buyer was thinking he got the “deal of the year.” Both believing values and prices would rebound to pre-recession levels.

Business Aircraft Depreciation Schedule

So what is the expected depreciation path a business aircraft will take? As a general rule, Banks and various financing institutions will value a 10-year old business aircraft at about 70% of the price when new. But to get a clear picture of aircraft older than that, I did some research of my own by creating a simple 40-year life depreciation schedule with a  residual or salvage value. I assumed faster depreciation during the first years, leveling off as the aircraft aged. After overlaying my data with Aircraft Price Digest’s historical pricing for a 1981 WW1, I was surprised how well the lines fit considering the economic variations during the last 30 years.

Pricing dropped during the recession of 1980-1982 and continued down until after the stock market crash in 1987. Prices then moved up until the recession in the early 1990’s and again softened. Prices moved to unprecedented levels during the period of “irrational exuberance” in the mid/late 90’s until the dotcom crash in 2000.  With the graph showing a depreciated value of around $800k at this time, I realized from this study, the Westwind will probably never be worth over $1 million again.

After using this same model on a number of aircraft of different vintages, two things became apparent:

1. Business aircraft pricing in the secondary market is never level or static. It is always moving up or down, absolutely dependent upon the current state of the economy. And,
2. During good economic times, dramatic price increases for popular models will most likely only be seen for aircraft less than than 20 years old. This is reflected in the graph where the price of this aircraft rose very little in the last economic upturn.

The pricing of some popular models, such as Falcons, will, on average, stay a little above this line throughout most of their life, holding their values better than most. Other aircraft run below the model’s line and you can see they never enjoyed the popularity or pricing support of some of their competition.                             

Business aircraft have an economic useful life and there are three events that will bring that life to an end as the value of the asset approaches the residual or salvage value.

1. Major airframe maintenance
2. Major engine maintenance, if not on a program
3. Damage beyond economical repair

A business aircraft is a sound business investment, but it is still a depreciating asset with a useful life, maybe somewhat longer than most other capital equipment.

Duncan Aviation’s Aircraft Sales & Acquisitions reduces the confusion and stress of buying and selling used aircraft transactions by managing the entire process for you. From advertising in prominent outlets, to negotiating purchase agreements, to coordinating pre-purchases services; they do it all.

Choose the better way to buy or sell aircraft. Contact a member of the Duncan Aviation Aircraft Sales team today.

Doug Kvassay is a part of a team of four Aircraft Sales Representatives. He specializes in advanced aircraft aftermarket analysis and managing complex transactions. His aviation career began in 1980.

Contributed by Doug Roth, Aircraft Sales Representative

Whether you are buying or selling a business aircraft, the Aircraft Purchase Agreement (the Agreement) is the most important document to the transaction. It incorporates all terms and conditions of the sale. It is vital that you understand all the details of the contract before you sign.

Agreement Language

The initial purchase agreement should be prepared by the legal counsel of either the buyer or seller with the final terms and conditions negotiated and agreed to by both parties. A typical Agreement can be only a few pages to well over 20 pages when finalized. The majority of the language will be about the pre-purchase inspection, the condition of the aircraft at closing, how the closing will occur and what happens if either party does not perform as agreed.

Buyer & Seller Responsibilities

Throughout the Agreement there will be detailed language instructing the buyer and/or seller to perform specific tasks at a specific time. For a buyer these tasks can include placement of a deposit in escrow, scheduling the pre-purchase inspection, accepting or rejecting the aircraft and placement of the balance of the purchase price in escrow for closing. For the seller these tasks can include movement of the aircraft to pre-purchase inspection, the correction of pre-purchase discrepancies and placement of the required documents in escrow for closing to transfer clear title to the aircraft.

Timing

The actual number of tasks and their timing can vary widely depending on what all Parties agree to and the legal safeguards added to the Agreement. Timing is a very important element to consider since one task may not be able to begin until another task is completed. For example, the acceptance or rejection of the aircraft typically does not occur until the pre-purchase inspection is complete or the closing typically does not occur until all discrepancies are corrected.

Check List

Before signing the Agreement, I recommend both the buyer and seller go through the Agreement and make a list of all the tasks that both Parties are responsible for including requirements and completion timing. Using a simple check list will keep you prepared to easily meet your obligations of the Agreement as the aircraft transaction progresses, eliminating the need to request a time extension for something overlooked. Also, by making the list before signing, there is still time to negotiate tasks that might conflict with each other or negotiate obscure tasks added by legal counsel.

Buying and selling an aircraft can be a stressful experience. You can lessen the stress by having a thorough understanding of the Aircraft Purchase Agreement.

Duncan Aviation’s Aircraft Sales & Acquisitions has been assisting operators buy and sell aircraft since 1991. Backed by in-house legal counsel, flight operations staff and over 2,000 airframe, engine and avionics technical representatives located around the world, gives Duncan Aviation first-hand access to, and knowledge of, the aircraft marketplace unmatched by any other broker or acquisition organization.

Visit www.DuncanAviation.aero/aircraftsales/listings.php for the latest aircraft for sale.

Doug Roth is only one of a team of four Aircraft Sales Representatives that has many years of aviation industry knowledge. With his experience as an avionics tech and pilot, he skillfully values aircraft and provides comprehensive aircraft consignment and acquisition services.

Contributed by Marc McKenzie, Aircraft Sales & Acquisitions

While banks protect themselves, they are choking small business opportunities.

Financing the purchase of an older aircraft has become a frustrating and tedious task. Many large companies avoid this hassle by purchasing older aircraft with cash. However many smaller business, who can only afford an older aircraft and must go through a lending institution, are finding fewer banks willing to talk to them.

Recently, Duncan Aviation had a buyer interested in purchasing an aircraft nearly 29 years old but still in great shape both inside and out. The prospect owned a small, successful business in the Midwest and was looking at purchasing a small business aircraft to expand into more regions of the United States. The aircraft fit his business needs perfectly.

The aircraft was manufactured in 1989 and had a Duncan Aviation maintenance track record. Aircraft specifications and photos were sent and it appeared we were on our way to price negotiations, intent letters and contracts. However, after calling the bank to see if they would finance, I got an entirely different answer. The financial officer told me it wasn’t likely they would even consider our buyer for financing.

He stated the age of the aircraft was a major factor. But even if the aircraft were 10 years newer and the buyer had already established a good financial relationship with them, the odds of financing would have only increased slightly. As it turned out, our buyer had never turned to this specific lending institution for any past financial needs. Therefore, the bank wasn't interested.  

The financial officer was still very helpful in referring us to other lending institutions that might have been willing to finance an older aircraft. Unfortunately, the processes to get the needed approval proved to be both tedious and very time consuming. In the end, the prospective buyer was unable to purchase the aircraft and it was sold to an operator who could pay outright in cash.

It is no surprise that lending rules have changed and the process is becoming longer with greater scrutiny on the buyer and aging aircraft. Even prior to the economic down-turn, many banks discussed the lending rules with business aviation groups and stated there would be changes coming. Today, lenders are more willing to finance an aircraft five to 10 years old. Yet if an aircraft is more than 20 years, lending becomes more challenging.

All small business owners who have a vested interest in opening a flight department need to keep two key elements in mind.

• Have an established financial relationship with a credible lending institution.
• Be aware the age of the aircraft in consideration will be a factor.

Duncan Aviation provides aircraft acquisition sales and consignment support for business aircraft. Our in-house aircraft sales team reduces the confusion and stress of used aircraft transactions by managing the process for you. From advertising in prominent outlets, to negotiating purchase agreements, to coordinating prebuy services: we do it all.

Marc McKenzie, is Duncan Aviation's Lead Market Analyst for Aircraft Sales, specializing in the after-market aircraft industry. His knowledge as an airframe maintenance tech gives him the practical and hands-on experience to accurately assess current market trends and aircraft resale. His aviation career began in 1989.