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Aircraft Financing Revealed. Tips and tricks to help you navigate the process.

by Mike Smith
Scope Aircraft Finance

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For a majority of aircraft buyers, an aircraft purchase may not be possible without financing, and financing is not possible without a bank.  The finance process can go several directions, and it all depends on the individual applicant as well as the bank they are working with. Regardless of which bank you work with I believe there are a few key ways you, as an applicant, can prepare for the process, which hopefully makes it as enjoyable as possible.

 

Fill out the application completely and answer all the questions on it

In most cases, the questions on the application are on there for a reason. If any part of the application is left incomplete, it could slow down the underwriting process, or worse, result in the lender creating false impressions of your financial picture.

If there is something, say something

There is no such thing as a perfect credit. Everyone has some complexity or moment in time where something happened. If you did have a hiccup in your financial past, mention it up front.

Don’t be offended by follow-up questions

Just like you don’t know us, we don’t know you. The underwriting time is an opportunity to get to know each other. Follow-up questions do not mean the bank is on a path towards a decline, it probably means the lender is making best efforts to learn about you so he or she can accurately provide financing solutions for your purchase.

Give them (the right amount of) time

Sometimes, approvals take some time. If you know that financing will be part of your purchase plans make sure to begin the application process as soon as possible. Even if you have yet to settle on a specific aircraft, the bank can offer a pre-approval and be ready to move once you select your aircraft.

Work with them

Contrary to popular belief, banks are not out there to “get” you. In our shop we look at every loan opportunity as a partnership and, since we’re in the business of funding loans, we want to work with our customers to do just that.

When I was a kid and played T-Ball, the last words my dad would say to me before I ran on the field was “remember, no matter what, just have fun.”  I pass the same words along to you through your aircraft purchase journey, whether it includes financing or not. No matter what, just have fun, and enjoy the world of general aviation!

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Issues Faced By An Aircraft Owner as Viewed By a Financial Planner

by Stewart S. Koesten, M.S.F.S., CFP®, CIMA®
KHC Wealth Management

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Not all financial planners know much about aircraft ownership, and others may discourage the idea of owning an aircraft.  They’re the ones who say if it floats or flies, rent it.  Not bad advice but let me share my story with you.

I used to rent, but it became impossible to plan ahead.  The FBO I rented from had a small fleet of rental aircraft that were also used for flight training.  They were well maintained, but that meant your need for the aircraft might conflict with their need to do a 100 hour inspection.  It got unmanageable and unreliable so I decided it was time for me to look for an alternative.  
I considered existing flying clubs in the area, fractional ownership and direct ownership.  I felt owning my own aircraft was preferable.  One problem with owning an aircraft is the amount of flying you think you’ll do.  I seldom fly more than 100 hours a year.  That’s really not enough to keep an aircraft mechanically healthy and the costs per hour reasonable.  I looked for an aircraft partner, and I found a great partner in my personal dentist.  The good doctor (seriously) was elbow deep into my mouth one day and asked, knowing I was a pilot, whether I’d be interested in partnering with him in his Bonanza.  It was hard to respond at the moment, but in time we developed a fine relationship with mutual respect for the aircraft.  That’s important.  Having a partner who abuses the aircraft can be a very bad and likely costly situation.  Along the way we added another great partner, and between the three of us we were able to fly around 250 hours a year.  Eventually the Bonanza became a turbo-Aztec.  Two of us are still in that partnership but today we own a Twin Cessna 414.   

No aircraft is perfect, but we found the large Cessna meets 75% of our mission requirements.  It is fast, pressurized, turbocharged and seats grandparents, children and grandchildren on the same flight.  It has legs too.  At 65% power, with five on board we can go just under 1000 statute miles.  We own the aircraft outright through our not-for-profit S-corporation.  We are set up as a flying club, and can have as many as five members.  The system works for us.  I maintain the books and records, and my partner maintains the maintenance and avionics.  We chip in a monthly amount for insurance, income tax preparation, oil changes, hangar rent, and annual inspections (the fixed expenses).  We pay in $100 for every hour we fly for engine and prop reserves (variable expenses), and we pay for our own fuel as used.  

When I fly for business my company reimburses me sufficiently for the expense of using the aircraft.  I don’t play games with taxes, and we keep good financial records.  I’ve never attempted to depreciate the aircraft since it isn’t used exclusively for business and I’d rather not get into a debate when audited.  All in, our aircraft runs about $500 an hour to fly.  That’s a bit less ($50/hour) than average for a large Cessna but our annual inspections, hangar costs and annual maintenance expenses have been considerably less than in other locations around the country.  That’s still a lot of money so it is important to make sure you can cash flow the routine expenses.  Occasionally, there are surprise expenses, and having extra resources to meet your obligation is critical both from a financial point of view as well as just feeling comfortable with the situation.  

Having an aircraft partner has been great, but what really works for us is that our schedules match up perfectly.  Seldom do we conflict.  We are respectful of each other’s need for the aircraft, and occasionally swap dates to accommodate each other.  We fly together sometimes.  
Recently, I’ve discussed with my own financial planner how to factor flying expenses into my retirement plan.  Here’s how I’m thinking about it.  If my financial plans indicate that I cannot afford to continue flying when I retire, then I’ll work part-time to fund my flying expenses.  When I can no longer work, or I am not physically able to fly then I will hang up my flying suit and discontinue part-time work.  Until then, working part-time is a great way to fund my love of flying that I would not otherwise be able to fund in my baseline retirement plan. Talk about motivation!

Owning an aircraft is expensive, but with careful planning and analysis you can choose the right aircraft.  Choose one that you can afford (first and foremost) and one that meets 70% or more of your mission.  There are financial planners who know little about aircraft ownership or financing.  If you are considering buying an aircraft make sure your financial planner and CPA are familiar with the financial and tax issues involved.  

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What's the Most Important Strategy for Selling an Airplane?

There’s been a lot written over the years about the best strategies for selling airplanes.  The advice covers everything from updating paint and interior to avionics upgrades to showcasing the latest features and benefits for prospective buyers.  You name it, it’s been covered.  Let’s cut to the chase though.  What really is the bottom line when it comes to aircraft sales?  No mystery here….it is the bottom line.

In other words, what are you planning to ask for your plane?  There absolutely must be a logical reason (and one that can be supported) behind your pricing.  There are things you can do to boost the value, but if the airplane is not priced properly then it really doesn’t much matter because buyers who perceive you’re out in left field won’t even call.  What you originally spent on the plane, the sum total you’ve invested since you bought it, what you owe on the plane, what you need for retirement, and what others may be asking all have no bearing on what your asking price should be.  The asking price should reflect what similar aircraft have actually sold for and be at a point that will not place the new owner upside down if they have to repair or upgrade items you’ve neglected.  It must be based on depreciated prices for installed equipment and only include the value for tangible items (ie, not the cost of labor to install).  Unfortunate is the owner who overpaid for their plane (or who have invested way too much in it) and are holding on to the hope that some other poor sucker will come along and overpay too.

You may find yourself in a situation where you want to sell your plane but the numbers just don’t add up.  Whatever you do, don’t put it on the market hoping that some magical buyer will pay your unjustified price.  The best thing you can do is to keep flying the plane and then reevaluate the sale at a later time.  This often happens when an owner has just dropped a small fortune into maintenance related items.  If you’re pricing your plane as if everything is working then you get no added value bringing things up to standard.  Offers will negatively reflect any deferred maintenance however.

A good aircraft broker will help you with price the plane properly based on experience and market data.  A better aircraft broker will acknowledge that pricing is not an exact science and will agree to list at a slightly higher number than they normally would (for a short period of time) to make sure nothing is being left on the table.  Sometimes an owner/seller needs to experience first-hand feedback before coming to grips with market realities.

If you’ve read between the lines then you can see the importance of keeping a positive cash position in any aircraft you own.  Owners who are highly leveraged often have a difficult time selling a plane for what it’s worth.  They have enough cash flow to continue funding the payment but not enough cash to actually sell.   Over the years I’ve seen far too many people turn down a slightly lower price than they wanted only to have the next offers come in even lower.  That, my friends, is a tough and unenviable position to be in.

Bottom line though is the bottom line.  Price the airplane appropriately and you will most likely be rewarded with a shorter time to sell, more offers to consider, and with any luck, a higher net sales price when all factors are considered.

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Does “Pedigree” Maintenance Matter?

Pedigree Maintenance – the kind of maintenance done by a shop that has a solid reputation and that specializes in your type of airplane – can make a big difference when it’s time to sell. 

Why?

Perceptions.

I was having lunch with a good customer and friend today and we were discussing his recent Piper Mirage acquisition.  “I sure hope you take your new plane to one of the top Malibu/Mirage shops at least every other annual,” I said.  “It can make a big difference in the sell-ability of your plane when the time comes.”

He nodded.

A specialized shop understands the intricacies of your make and model.  They see enough of them to be able to identify trends and spot irregularities long before your local mechanic may notice anything is wrong.  And they’re good at predicting and warning you about potential squawks based on the way you operate your aircraft.

Sure, your local guy may be the best in the business.  Everyone likes to think their guy is better than everyone else’s.  That’s natural.  But your guy probably isn’t known anywhere else, may not have done extensive training for your plane, and may not have the resources to have multiple eyes look at your plane during a single inspection.  How much billable time do you want him to spend learning on your plane anyway?  However, “specialized” doesn’t necessarily mean “factory authorized” or “service center.”  Many of the best shops have no OEM affiliation.

While it may be overkill to take your plane to the specialty shop for each and every maintenance event, it should net you a quicker sale (and time means money) when future buyers see the work has been done by someone with widespread acceptance and experience.

In this case, perception is everything.

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Cheap or Good?

Speaking only for myself – I can imagine that others may feel the same way – one of the most frustrating, and frankly counter-productive, first questions a buyer can ask is, “so, what’s the lowest you’ll take for that thing, anyway?”

Really??

I mean, you don’t know a thing about the airplane other than what you’ve seen on the ads.  More than likely, you haven’t taken the time to dig into the logs or speak with the mechanic to see what type of maintenance has been done on the plane.  You certainly haven’t seen it yet.    Have you even considered the possibility that a “cheap” airplane or “smoking deal” may cost you more in maintenance, upkeep and upgrade than you’ll ever save on the front end?

When a buyer asks me this question within our first few minutes of conversation I automatically lower my expectations of that prospect and begin to discount their legitimacy.  Experience has taught me over and over again that this question is often asked when little research has been done, when they suffer from price myopia, or when the buyer can’t think of anything else to say. I've also found this question to be reflective of their ability to financially qualify for the plane in the first place. 

Some say there are no dumb questions.  Honestly, I’m not so sure about that.  What I am sure about is that there are dumb times to ask certain questions.  Buying and selling is a lot like dating.  There are just certain questions you don’t ask until you get to know someone first.  Know what I mean?  Should you forget that basic principle, you’ll likely find that to be your last date…or worse.  Educate yourself first.  Try to get as much of the big picture as you can before jumping right to the bottom line.  You’ll undoubtedly find the other party more receptive and appreciative of the efforts they’ve made to maintain their airplane. 

So, if you call and ask me that question, don’t be surprised if my response is, “Do you want a cheap airplane, or do you want a good airplane?”  Because there’s a difference; a BIG difference.  Happy and successful aircraft ownership is based on understanding the costs involved, not just the price.

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How to Handle the Sale of an Elderly or Ailing Family Member's Airplane

It’s not easy to watch a family member age.  It can be particularly difficult if that person still retains assets that, at some point, must be liquidated; even more so if there is an emotional attachment to those assets.  The same issue applies to loved-ones who become unexpectedly sick or incapacitated.  Airplanes represent a particularly challenging set of choices that will have to be made.  This is not a situation I envy or look forward to dealing with myself, yet it is a fact-of-life for most of us…or at least it will be. 

I have never met an aircraft owner who did not perform substantial due diligence before finalizing a purchase.  We all want to know what we’re getting ourselves into and, ultimately, that we got a fair deal.  Many aircraft owners are very savvy business people, investors, and professionals.  We all like to think that we make good decisions and that our “investments” are wise ones.  Much of this is based on expectations and our own personal bias.  After all, a good investment for one person can be a sink hole for another.  Aircraft owners, especially those who bought their airplane before the turn of the century, were used to consistently appreciating aircraft values.  You could buy a plane and, except for unusual circumstances, sell it for at least as much as you paid for it.  But, the burst of the internet bubble coincided nearly exactly with a ramp up of manufacturer production (which provided new units to a stagnant inventory) and with the slow but steady loss of general aviation pilots.  According to Vref Value Reference, complex singles increased in value by 27% from 1994 to 2000.  From 2001 to 2009 they declined by nearly 35% in value.  Since that time the trend has been nearly flat with a 5% overall increase -- most of which was recorded before 2011.  The light twin index has been similar while the turboprop index has been more volatile.  Thus, many owners who either bought prior to the 2000 decline or those who spent the majority of their aircraft ownership career prior to 2000 may have unrealistic expectations about the value of their aircraft.  This, combined with the effects that aging has on our cognitive abilities and heirs who want to get as much as they can, often results in a situation where aircraft are retained for far too long amid declining values and aircraft carrying costs.

Let me share a recent example with you.  I have a client, we’ll call him Ted, who is looking for a 2000-era Piper Malibu Mirage.  He’s got about $500,000 to spend and, like all buyers, wants a fair deal.  We recently identified a possible candidate, went to do a quick visual inspection to see if the specs matched reality, and made an offer contingent on a full pre-purchase inspection.  The seller, who was represented by a very capable and reputable broker, was firm at $500,000.  Given the specs and recent market activity, this is a plane that should sell for $440,000 to $460,000.  He (the seller) had already turned down an offer of $485,000.  Our offer was at $459,000 and you can probably imagine how that was received.  The elderly seller, it was discovered, was in failing health and had a strong notion of what he thought the plane was worth.  Unfortunately, he was wrong.  Now, he’s in the hospital and his non-flying children are in charge of the sale.  They have now dropped the price (well below the first offer of $485,000) and are still sitting on the airplane.  I was told again that they are “firm” on this price and there is no room for negotiation, even though the plane is still over-priced.  We’re not looking for a steal, mind you, just a price that matches the market.  According to JetNet, insurance and depreciation alone for a Malibu Mirage exceeds $23,000 annually.  Every month they wait to sell is a hidden $1900 loss to their bottom line.  This doesn’t include the negative perception buyers have of airplanes that don’t fly regularly or the cost of recurring annual inspections.  Holding on to the plane another 6 months will probably cost them more than taking our $459,000 offer would have, and they would have freed up substantial emotional capital by getting the plane off their minds.

Here’s another example.  This one worked out better.  My client, Ben, was diagnosed with terminal cancer just prior to listing his A36 Bonanza.   He was fairly realistic about the value of the plane yet still held on to a pre-2000 aircraft value paradigm.  Unfortunately, Ben’s health took a turn for the worse and he was admitted into the hospital.  He recognized his diminishing capacity and turned the sale over to his son who was a non-pilot.  His son looked at the sale of the plane as a business transaction and tried, however difficult, to remove all emotion and sentiment from the plane.  As such, when a reasonable offer came in, Ben’s son was prepared to accept.  His wise decision probably saved Ben’s family a lengthy period of turmoil over the plane since shortly after the sale Ben passed away.  His family and his estate no longer had to worry about the disposition of that sizable asset.

So, whether you’re the aging owner of an airplane or have a family member who is, keep in mind these observations:

·        If you haven’t received an offer near the price you want in the first 4 months of the airplane being for sale, you probably never will. 

·        Planes need to be flown and ones that have been sitting for lengthy periods of time will scare away potential buyers.

·        There are carrying costs (insurance, hangar, operation, maintenance, and depreciation) to aircraft ownership.  These costs almost always exceed any hoped-for increase in aircraft value.

·        Don’t let the airplane go out of annual.  If you do, you might as well tell prospective buyers you can’t afford the airplane and are desperate.

·        Planes generally don’t increase in value by any meaningful amount.  Don’t take it personally or think you’ve somehow made a bad financial decision if your plane is not worth what it once was.

·        What you’ve spent on the airplane, how much you owe, the total cost of upgrades, or what you need for retirement have little-to-no bearing on what the airplane is worth.

·        Comments like “I’ll keep it before I give it away” or “I’ll make it a lawn ornament first” are emotional statements that will cost you time and money.  At some point, even for the most stubborn of us, reality kicks in and you will realize that continuing down that path will be far more expensive than you originally thought.

·        Waiting for “the market to go back up” is not a strategy either.  For every 10% market decline it takes 11.1% to regain.  History demonstrates many 10% losses but few 11% gains.

·        And, finally, just because your close relative thinks the plane is worth X doesn’t make it so.  Seek, and listen to, the advice of a professional who is in that market.  Get second and third opinions if you need to. 

Every situation is different.  What’s important to remember here – regardless of whether you’re the aircraft owner, an heir to the sale, or estate executor – is that those who handle the sale from a business perspective and try to remove all emotions are the ones who fare the best.

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What are the first two words in “Good Customer Service?”

Of course, the answer to the question in the headline is “Good Customer.”  Easy enough right?

Wrong.

Why?  Because far too many people demand good customer service without actually being a good customer.  They are rude, arrogant, condescending, and boorish.  They are entitlement minded.  They’ve conned themselves into believing that they actually deserve good customer service without having to give anything in return.  They’ve become that person you’re embarrassed to go out to eat with.

How did we forget basic civility in this country in such a short period of time?  Why is it we think we are special, that we know more than previous generations, and that our expectations are justified?

Don’t agree with me?  Take a look around the next time you’re at a restaurant and watch how patrons treat the wait staff.  Think about how you’ve treated a vendor whom you’ve never met in person.  (Anonymity can easily foster this type of behavior – social media diatribes are a case in point).  Watch how the gate agent is treated the next time you’re at the airport.   I’m not talking everyone here, but it probably won’t take you too long to find someone who fits this description.  Heck, I find myself guilty of such actions from time to time.  We all do.  But enough is enough.

My intent here is not to get into what’s happened to our societal norms, values, and behavior.  What I want to do is to help each of us see where we fit into this equation and what we’re each doing to foster this unhealthy environment.  And it starts with expectations.  Who told you things were going to be perfect all day long?  Did someone, somewhere, whisper in your ear that you have a right to demand perfection from others yet expect grace when it comes your own shortcomings?  I’ll bet your mom didn’t teach that you shouldn’t ever have to wait.  Nor did your dad tell you things wouldn’t go wrong.  If they were good parents they probably told you things like “get over it”, “suck it up”, or “treat others the way you want to be treated.” 

Just to set the record straight, I’m certainly not writing this article based on experiences with my customers.  I’ve got a very deep respect with those who do business with me and vastly appreciate their perspective and experience.  And, almost without exception, I’ve found them to reciprocate on every level.  I like to think that folks in my industry are a notch above others, but I may be slightly biased.  My comments are however based on casual observations from daily life.  Traveling.  Going to the movie.  Eating out.  Waiting in lines at the airport. 

May I encourage you then, the next time you’re faced with a less-than-perfect customer experience, to put on your best face, lift up those who are serving you, and get out of the paradigm that you’re owed something and are not getting it.  In other words, get over yourself, roll with the punches, and appreciate the efforts of others.  Do that, and I’ll bet you’ll notice an improvement in the customer service you receive.  

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Top Overhauls Add Value to My Plane, Right?

Do top overhauls add value to your piston-engine airplane? This is a question I get a lot and the answer is almost always “No,” however a lot of owners/sellers don’t want to accept that answer, presumably because they’ve just spent thousands on engine work. “But I have new cylinders,” they say. “Isn’t that worth something?” Yes, it is, but you’re starting from the wrong baseline. You see, this type of engine work simply brings the value back to that of a fully functional engine and gives it marketability. In other words, if you didn’t do the top overhaul, the engine would be worth less and largely unsellable. Doing the “top” it does not add anything to the value of the engine.

“Why,” you ask?

The answer is simple. A top overhaul does not reset the engine TBO (Time Between Overhaul) interval.  It is simply a stop-gap measure designed to do one of two things: 1) replace ailing cylinders in the hopes the engine will make it to TBO when a full overhaul will be needed or 2) to help an owner get more time out of an engine that is nearly timed out but still running well.

The rub, of course, is that you often don’t have the luxury of whether or not to do a top overhaul. That’s why it becomes very important to weigh the cost of a top overhaul against the cost of a complete engine overhaul. Depending on your engine and mechanic, a top overhaul can easily run three thousand dollars or more per cylinder. Have 6 cylinders that need replacing? Then it doesn’t take long to figure out that you could be throwing good money after bad if you’re getting close to your engine’s TBO. Have lots of hours left to TBO? Then it might make sense to do the top overhaul instead of blowing more cash on a full overhaul. For many engines, especially those that are turbocharged, a top overhaul near the mid-point of the engine life should be planned for. Without getting into the engine operating technique debate, suffice it to say that a mid-life top overhaul is a fact of life for many engines.

I too wish top overhauls added value. But alas, this is aviation and as with most things, there is rarely a positive return on investment (unless you factor in safety, peace-of-mind, joy of ownership, etc). Spending money doesn’t make you money but it can keep you from losing more money.

What do you think?

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Vref – Why you’re probably using it wrong

Vref and Aircraft Bluebook, the two primary aircraft valuation services, are helpful when it comes time to figure the retail value of an airplane before buying or selling.  For this article I’m going to focus on Vref since so many AOPA members use the “watered-down” Vref service at AOPA.com.  Methodologies behind both are similar however.  Not surprisingly, buyers tend to leave items off their valuation to drive the price of an airplane down while sellers will throw in everything but the kitchen sink to inflate the price.   If you live in the real world let me show you how to correctly calculate a Vref value.

First, there are 3 important things you should know about “book” values:

1.      They are only a place to start.  In the end, unless a buyer and seller come to terms on price, it really doesn’t matter what the book value is.  If you’re stuck on a book number then you’re either going to own your plane, or be looking for one, for a long while.

2.      The numbers in the book are only as good as the data that’s fed into them.  Aircraft brokers and dealers, WildBlue included, periodically report sales values to Vref and those values are used to adjust the pricing models on the next quarterly issue.  Reading between the lines, it is therefore theoretically possible for a dealer who primarily sells one make or model to skew the data by falsely reporting values. 

3.      The information always lags the market.  Since the data is released quarterly, the numbers could be as much as 3 months out of date.  In a changing market, that could make the result completely unreliable.

When it comes time to actually calculate the book value, you must keep these things in mind:

1.      Physical depreciation plays a part in every aircraft.  In other words, virtually no upgrade to an aircraft will yield a 100% return on investment.  Some items, like the cost of labor, add no value.  Others, like specialty mods, may add some value but only to the right buyer.  One of the biggest mistakes made is assigning value that can’t be justified.

2.      Valuation services assign items to be included in the “base price” of each aircraft.  These items  are already calculated into the price of the airplane therefore you should not add additional value to any item that is already part of the base price.  Conversely, if one of those items has been removed from the aircraft then the value of that item should also be removed.

3.      Unless the or component is brand new, full retail value should never be credited to the bottom line.  In fact, the instructions directly from Vref read:

“Rarely will an avionics upgrade add its full cost or nearly full cost to the value of the airplane.  If the radio or radio package is new within the last several months, it can add 70% or 80% of its cost to aircraft value.  Normally, most new radios retain about 40% to 60% of their new cost.  In most cases, it is appropriate to add about 50% of the new cost to aircraft value.  A 40% to 60% factor is appropriate in most cases.  Most older radios do not have added value.  State-of-the-art GPS/Comms retain 50% or more of their value for many years.  However, a new ADF or DME would have no added value.  Also, if a plane is expected to have a certain item, such as radar or autopilot in a twin, there would be no added value.”

4.      The books assume everything is in working order.  You get no brownie points for replacing an alternator, changing tires, or doing other routine or required maintenance. 

Calculating a “book” value is part art, part science.  Let me reiterate a previous comment – book values are a good place to start but are not the gospel truth.  Take them with a grain of salt and question the any add on’s and deductions.  After all, in the end, an airplane is only worth what a buyer and a seller are willing to settle on.

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The Negative Impact of the Strong US Dollar on General Aviation Aircraft Sales

If you are an owner of a later model general aviation aircraft, you have multiple forces at play which impact the overall valuation of your asset.   Items within your control include how well you maintain the airplane, whether or not you have damaged it, upgrades and modifications that may have been done, and so forth.  Outside your control include the supply of new and used aircraft, the number of new pilots and potential buyers entering the buyers pool, the economic outlook, fuel prices, and world currency fluctuations, among others.

Specifically, I’m going to address how the strong dollar has impacted aircraft values and marketability.  Since our clientele consists primarily of those who own and operate modern aircraft (post-1984, by our definition) valued at over $100,000, my comments will focus on that market segment.  To set the stage, I will not be focusing on the dollar’s average strength as measured against multiple currencies, but rather its position as it relates to just one currency, the Brazilian real.  Brazil, like several other emerging economies, has seen an increase in demand for quality general aviation aircraft and has fueled a number of exports for us (and many other aircraft resellers) over the last decade.

In 2008, the real/dollar exchange rate bottomed out around 1.56 reals per dollar. At the end of 2008 that number peaked at 2.51 but quickly dropped again and remained under 2.50 until 2014.  During this period, it was not uncommon for us to sell nearly half of our inventory outside the US (the highest percentage of which went to Brazil).  Today the exchange rate sits at 3.51 but has peaked at just over 4.00 in the last 8 months. Now, a Brazilian buyer would have to pay nearly two-and-a-half times the amount he did in 2008 for the same piece of equipment.  That assumes, of course, all other factors remain equal and ignores internal economic pressures on the real, but you get the picture.  It costs a lot more for a foreign buyer today than it did 3 just years ago.  Given that it will cost a buyer in that part of the world $12,000 to $15,000 just to have the aircraft delivered to their location you can quickly see that they need a sizeable exchange rate advantage before it makes sense for them to consider importing an airplane.  Buyers also have to include the cost of repairs and maintenance their country may mandate, tariffs, taxes, permits, and other bureaucratic inefficiencies.

So, what does this mean to you as an aircraft owner and potential seller?  First, because of a smaller buyer’s pool for your aircraft, it likely means a longer sales cycle (i.e., it will take you longer to sell your plane than you anticipated).  And second, because of reduced competition from foreign buyers your incoming offers may be lower.  (As a side note – before the dollar’s current strengthening cycle, I used to chuckle at US buyers who would low-ball an offer only to be quickly beaten out on a good airplane by a foreign buyer who could take advantage of exchange rate economics.  Alas, such is not the case today.).  Fortunately, lower oil prices, reduced insurance rates, reduced production of new airplanes, and strong business travel demand have combined to keep values steady.

In all likelihood however, it will take a weakening of the dollar to the 2.50 mark (or a strong signal that it’s headed in that direction and will stay there) before we see renewed interest from Brazilian buyer’s and a potential increase in the valuation of high-quality, late-model, US general aviation aircraft.  In this contemporary cycle time almost always favors the buyer over the seller when physical depreciation, the fixed costs of aircraft ownership, and debt service are considered.

I’m looking forward to the return of a weaker dollar but, until that time, will continue to guard my client’s economic interests based on current realities.  Here’s the bottom line -- If your intent is to sell, holding out for an above market offer will likely cost you far more than you anticipated in today’s environment.

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The High Cost of Upgrades

If you update/upgrade your airplane, how much return on your investment can you expect?  Full price?  Pennies-on-the-dollar?  Somewhere in between?  This is an issue we’ve discussed before.  We even did a YouTube video on it several years ago (https://www.youtube.com/watch?v=B-P_zRYH--c).  It is a subject that needs to be readdressed.

Aircraft owners love to update their airplanes to their taste and needs.  That’s great.  There’s nothing better than having an airplane that is exactly the way you want it.  Sometimes, in their zeal to make the airplane “perfect” those same owners don’t necessarily consider how much of their money they’ll actually be able to get back when they decide to sell the plane.  Many folks are under the false notion that everything they spend on an airplane increases its value.  Some owners fall prey to avionics sales people who convince them they will get a sizable portion of their investment back. Almost without fail, these folks are disappointed – maybe even frustrated – when they can’t get anyone interested in their plane that is vastly overpriced.
Before you begin to spend money, take these commonly accepted rules-of-thumb into consideration:

  • The cost of labor rarely adds any value.  If you install a new GPS com for $15,000, and $5000 of the total was for labor, you probably won’t get any of the labor cost back.
  • Most components, especially avionics, depreciate rapidly.  If you’re installing state-of-the art radios, expect them to be worth 2/3 of their original value within the first year, 50% in the next 2-3 years, and maybe 1/3 after that.  Used radios tend to hold their value better since most of the initial depreciation has taken place.
  • Popular, widely accepted STC’s, should retain at least ½ of their value for years after installation.  If you’re going for a specialized upgrade or modification, don’t expect there to be a lot of buyers who are looking for that type of installation however.
  • Routine maintenance adds no value.  If you don’t keep your plane maintained, it will detract from the overall value though.
  • Engine overhauls, especially those from a well-known shop that offers a robust warranty, will retain their value when pro-rated for hourly usage.  Don’t make the mistake of believing that your 100-hour engine that was overhauled 10 years ago will be appealing to buyers.  It won’t. 
  • Quality paint and interior upgrades should retain ½ of their value for the first year or two after application/installation.  After that, they will add very little to your overall value.  As with required maintenance, poor paint and interior will subtract from the value.


Obviously, these rules are not hard and fast.  They have been learned however following years of market study, evaluation, and experience.   Airplanes themselves are not sound investments and advertisers who claim otherwise are misleading you.  What you are investing in is time-savings, safety, economy, and pleasure -- all noble and wise expenditures.

Before you put money into your airplane, give us a call and we’ll be more than happy to discuss your project and give you a second opinion.   Going into any project with your eyes wide open will certainly make you a happier and more satisfied aircraft owner.

Here’s to good flying!

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Equal Discomfort

Buying and selling airplanes is a balancing act.  There is a small window, almost like the center of gravity envelope in an airplane, for a successful transaction to take place.  Some things, like the right airplane, the right price, and willing buyers and sellers are obvious parts of the equation.  Other items, like contractual terms, personality differences, and additional people involved in the transaction are not so obvious.

If there’s one thing I’ve learned in my years of selling hundreds of airplanes it is that trust is hard to earn, hard to keep, and nearly impossible to recoup once lost.  Good communication goes a long, long way to keep everyone satisfied and out of the dark.  I’ve also learned most people are reasonable and don’t expect perfection.  They understand unusual situations may develop.  They’re ready for the occasional curve ball.  And they know things don’t always happen as planned.  But if you throw them onto an unequal playing field their willingness to cooperate is sure to change…quickly.

Aircraft purchase agreements can be one of those uneven situations.  A good PA has provisions that protect both the buyer and seller and don’t put undue burden or liability either party.  Not all contingencies can be spelled out or even foreseen.  But these agreements will contain most of the typical clauses that adequately address the needs of the buyer and the seller.  If one party to the sale demands that their provisions be protected while stripping out the same protections for the other party animosity is sure to appear.  Oftentimes, this is not intentional but may result after a third (or fourth or fifth) party gets involved – (a lawyer, another broker/dealer, a mechanic, a flight instructor, a buyer’s agent, or maybe even another family member).  Often – but not always – with the best of intentions, theses “extra” folks draft a PA with their interested party and their pet provisions in mind without looking at the bigger picture.  That picture, of course, involves the folks on the other side of the deal too.

The lesson to keep in mind is this:  whether you’re a buyer or seller, don’t expect the other side to overlook your lopsided provisions and still be able to maintain any amount of trust with you later, if there is a later.  It’s critical that both sides have the same level of comfort (or discomfort) throughout the process.  That can be tough, especially if neither has the chance to meet the other face-to-face.  Instead of trying to struggle through a process they believe to be tainted many people, regardless of the side of the table they’re on, will simply walk away if given a one-sided offer.  Why waste time dealing with someone who doesn’t show any respect or common decency to them, they reason. Sometimes this works out to their benefit, sometimes not.  What is clear though is that a well-structured, clearly communicated, and equitable contract will do a much better job at keeping everyone satisfied and greatly increase the odds that your sale or purchase will close with limited hassle.   So, if you retain a 3rd (or 4th or 5th) party in your transaction, ask to read the agreement before you put it forth and try to put yourself in the shoes of the other side.  Preventing cold shoulders from other side will make your effort extremely worthwhile.
 

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Training Done Right

I had the absolute pleasure of having lunch with Chris Carmody of Air Flight Training (www.airflighttraining.com) yesterday.  If you own and/or operate an M-Class Piper or Pilatus PC-12, you may have heard of Chris before.  Previously in aircraft sales, Chris has transitioned to personalized, high-quality aircraft training and has built a very successful business based on that concept.  Own or operate a Piper Malibu, Mirage, Matrix, Meridian, a Pilatus PC-12 or TBM?  You should give Chris a call.

As you probably know, aircraft training providers run the gamut.  Some do the minimum required to get a customer “signed off” while others take the right approach and go above and beyond to provide the quality of training that they can feel good about.  Chris is obviously of the latter camp.  He believes in quality training and will only take on those clients who also value and understand how good training can make them better pilots.  I love Chris’ philosophy.  As a former Air Force instructor pilot I know first-hand what it means to be involved in a world-class program.  If you didn’t measure up, then you were shown the door.  Which is as it should be.  There was no room for mediocrity nor for the mentality of “just getting by.”  Pilots who were not genuinely interested in bettering their skills and improving their decision-making abilities were simply not welcome.

Those who give training lip service and who think much of it is a waste of time scare me.  That mentality is careless and often catches up with them.  Unfortunately, others often suffer because of their “John Wayne” mentality.  Fortunately, those types of personalities find themselves to be in the minority, but in some dysfunctional environments they still flourish.  However, we can all suffer from poor decision-making from time to time and our skills can become rusty.  This gives everyone – from the occasional flyer to the seasoned veteran – reason to utilize and appreciate quality recurrent training.  Take advantage of those who have “been there, done that.”  You’ll be glad you did.

Thanks, Chris, for reminding me of the importance of great training and for your dedication to doing things the right way

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Buyer's Market or Seller's Market?

I recently read an article in a local business magazine that struck a chord.  The article asked business brokers whether business buyers currently have an advantage or whether the power rests with sellers.  One line in particular really made sense.  It said, "if you have a good business, one that is growing profitably and in a good solid industry, you're always going to be able to get top dollar in that industry."

o a certain degree, that same concept translates into aircraft ownership.  If you have a desirable airplane model, keep it updated, avoid damage, and have not skimped on maintenance, you should be able to get top dollar for that airplane.  Of course, everything is relative and if the market has dropped 30% you're probably not going to recoup that loss.  You should however, be able to net a much better price for your asset than your peers who have not paid the same attention to their airplanes.

Strategies

If you'll oblige, let me share with you several strategies I've seen that have worked the best for the people we help.

1.  Begin With The End In Mind

First, and you will recognize this if you are a Stephen Covey fan, you have got to begin with the end in mind.  f you are going to buy an airplane, your first thought should be, "How will I fare when it's time to sell?"  If you are buying a model that has a terrible history of retaining any value then you should not be surprised that there is still no marketbable value when you get ready to sell.  If you are putting little to nothing down and have a debt-to-equity- ratio nearing 1:1, you probably ought not be shocked when you find yourself upside down on your loan when it is time to sell.  Take an objective look at the plane you are considereing before making any commitment.  Often, this involves asking a third party for their opinion.  In any case, do your homework before you set your heart on aspecific bird.  Allowing emotions to enter the equation at this stage almost always means you are gong to lose more money than you should.  

2.  Proper Maintenance & Necessary Updates

Second, maintainyour airplane properly and keep it updated.  You do not have to go overboard, but insisting that your 20 year-old panel does not need a facelift is delusional.  Buyers want to see some upgraded avionics.  Updated radios, fresh engine overhauls, and thorough annuals will do more to retain the value of your plane, and hence create ore of a sellers market for you r plane, than will new paint and interior.  Most buyers prefer to spend money on things that will customize the plane for them rather than on things to bring the airplane up to date.  Naturally, keeping your paint and interior in first rate -- or like-new -- condition will help the cause.

ere is a good example.  WildBlue sold a Beech Bonanza for Don.  Don's airplane was nearly 20 years old and, on the surface, looked it.  The paint and interior were original.  They were not in bad condition, but they were not great either.  Don flew his plane regularly and made the decision to spend his money on things that mattered.  For instance, he swapped out one of his old King radios for a new Garmin GPS, added an Aspen primary flight display, and upgraded his engine to one with higher horsepower (which, as a result, increased his useful load too).  Don's maintenance program was routine and thorough and his logs were well organized and easy to read.  Besides the outdated cosmetics, the plane was in top notch condition.  If you are one who tracks "book" values, this is an airplane that "booked out" at 2-3% less than the sales price.  While that number might not sound impressive, consider that at the time of the sale, most planes in his category were selling for 5-7%below book value.  In essence, Don got a 7-10% premium on his plane.

et me contrast this with another client we'll call "Steve."  Steve had a similar, yet slightly newer aircraft that he bought new.  During his 15 years of ownership, other than very good maintenance, he had done nothing to keep the airplane up with the times.  The radios were original and the engine time was approaching the high range.  His paint was still in very good condition as was the interior (although it was cloth, not leather).  Steve's airplane ultimately sold for well below book value.  Why?  Because when the new buyer factored in the cost of needed upgrades, the price he was willing to pay was the highest amount that would keep him from owning an airplane that was worth far less then the amount he had invested in it.

3.  Manage Your Expectations

Finally, my last bit of advice to buyers is to not expect the plane to retain its value.  Sure, some airplanes will increase in value and some will hold their own, but most airplanes are a depreciating asset.  Any broker, dealer, or owner who tells you otherwise is shooting for a quick sale.  You are not buying a plane as an investment; you are investing in a tool that provides other tangible and intangible benefits.  The true cost of ownership should take those items into consideration too.  

The popular and contemporary position is that it is a neutral market -- neither favoring the buyer nor the seller of high-quality piston singles and twins.  However, good airplanes with solid backgrounds and routine care should have a much better chance of netting top dollar than those that have been ignored by their current owners.

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What is an Offer?

Think you’re ready to buy an airplane?  Want seller’s to take you seriously?  Then don’t waste everyone’s time with an “offer.”  Make a real offer.   Let me explain the difference.

Understandably, buyer’s want to find out how low a seller is willing to sell.  And the most relied upon question they tend to ask is, “What’s the bottom dollar on this thing, anyway?”  (As if a seller is going to just spill the beans right there on the first call and say, “you know, $X is my bottom number.”)  Anyone who has ever sold so much as a skateboard knows this is a terrible question to answer.  Why?  Because the next thing you’re going to hear from a buyer is an offer for an amount less than that so-called bottom number.  A savvier buyer will resort to the next tactic of “offering” a number, which is to casually throw out a number.  “Think he’ll take X dollars, they’ll say.”  Trouble is, there’s no commitment behind this “offer.”  It’s a fishing expedition.  Or knowledge they’ll leverage against the next guy.  That’s what an “offer” is – it is a number proffered to the seller with no contractual or monetary commitment.  When they’ve heard the sellers response, as often as not, they disappear to never be heard from again. 

An offer, on the other hand, is a bona fide bid backed up by a commitment of some sort.  Most of the time this involves a written proposal or contract.  Many times it involves a deposit to show good faith.  This type of offer establishes all of the parameters of the deal that go beyond the dollar amount to include things like the type of inspections to be conducted, who pays for what repairs that are needed, where the inspection is to be performed, how funds will be transferred, who is responsible for taxes, what contingencies exist, and so forth.  These scenarios all come at a cost and are important for a seller to consider when evaluating the overall proposal.  This type ofoffer is also equitable and allows for the buyer to be released from the contract and the deposit returned if the terms of the deal are not followed by the seller or if the airplane being sold isn’t as represented.  Unless you’re trying to buy a low-end airplane, think of an aircraft purchase as being more like a real estate transaction and less like an automobile purchase.  

Want the seller (or his broker) to take you seriously?  Then take the time to make a real offer.   A good aircraft broker or dealer can make this process easy and will help establish a sold relationship that all parties can feel good about.

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Man Up

Life sometimes presents us with uncomfortable situations, doesn’t it?  Usually, these events involve telling someone “no.”  And often, these situations could – or should – have been handled at an earlier time if it were not for our own unwillingness to handle them.  Such dilemmas range from telling someone we don’t want to date them anymore to telling a boss we don’t want to work for them (or vice versa) to firing a vendor.

How do you handle them?  Do you pick up the phone, or even better, make a point to tell the person face-to-face?  Or, do you slink around the issue by sending an email or text.  Worse yet, do you refuse to do anything and just hope it all goes away?

A friend and sales coach of mine, Dan Stalp, taught me that one of the key philosophies of a good sales person is to handle the most uncomfortable things up front…and to do it in person (or over the phone if distance is a real issue).  This is not only a good sales tactic that treats others with dignity and respect, it is a good life philosophy as well.  Yet, some of us never seem to learn this basic lesson, do we?  Some of us (and I mean you, me and everyone else) have at times taken the chickensh… approach by sending a “Dear John” email or text instead of confronting the issue head-on.

Is it easy to do?  No.  Absolutely not.  But, like I tell my teenage son, you don’t have to like doing it, you just have to DO it.  In other words, as I tell him, don’t hide.  Just man up.  The other person deserves at least that much from you.

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Trust, but Verify

When it comes time to purchase an airplane, whether new or used, it's very important to do your own due diligence.  It's good to trust others about what they have to say about the plane and it's history, but it's far better to validate that information on your own.

No airplane is perfect, especially a used one.  If you're in the market for a "perfect" used airplane, then you're going to be looking a long, long time.  All used aircraft will have imperfections; either with the cosmetics, older avionics, possible damage history, vague log entries, etc., etc.  And most will have had instances in their history that will bear a deeper look.  For example:

     - Why does one cylinder continue to have compression problems?
     - A major alteration was done but there is no FAA Form 337 to be found.
     - Does the new interior have the proper flame retardant certification?

Cast a skeptical eye on anything that seems out of the ordinary.  Make phone calls and ask for work orders or a more detailed description of the maintenance performed if necessary.  Listen to your mechanic but get a second opinion.  Most of the time there will be a sensible explanation.  Sometimes not.  And just because a major shop (or one with a well-known reputation) did the work don't always assume it was done correctly.  People are human and mistakes are made.

Good luck in your search!

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It's the Training, Dummy

We've seen both ends of the spectrum, from aircraft owners who do minimal training and fly questionable aircraft to those who invest heavily in training, equipment, and maintenance.  Naturally, economics have some role to play in how an aircraft owner treats their training and equipment, but most of the time the primary driver is the their philosophy and attitude.

Take, for example, the owner who does little training but invests heavily in every new gizmo that comes on the market.  This person tends to convince themselves that technology will keep them safe.  On the other hand, there are those who are frugal investors in new technology but will spend the time and money necessary to ensure their skills, decision-making, and knowledge of their craft are always up to par.  Which pilot would you rather fly with?

Here's my two cents.  If you have the means -- and ability -- to equip your aircraft with (and properly use) the latest equipment and take advantage of excellent training opportunities, then you should absolutely do so.  But, if you need to make a tradeoff between a rapidly depreciating piece of avionic equipment and the chance to make yourself a better pilot, my money is on training...every time. 

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We'll Find You a Place to Sit

My wife and I were recently invited to a seminar held at a local business.  The sponsors are friends of ours -- great people -- and have an honorable reputation.  The seminar, which lasted about an a hour and a half, included dinner.  We wanted to support them and, in the end, decided to do business with them after the presentation.  Had we not known them however, I doubt we would have engaged them in a professional relationship.

Why?

We were told to arrive at 6:30 pm.  When we got there, precisely at 6:30, the seminar had already started and most of the other invitees had already finished their meals.  Clearly, there was a mix-up with the start time.  Yes, there was food left over, but there was no where for my wife or I to sit together.  Not wanting to interrupt the presentation, we decided to stand at the back of the room.  I found it surprising that none of the other invitees offered to make space, remove their belongings from empty chairs, or make any other effort to accommodate the newly arrived guests.  Nor was there an offer made by the hosts to move available chairs to allow us to sit.

Now, don't get me wrong.  I am not one of those people who expects to be accommodated everywhere I turn.  The concepts of "accommodation" and "entitlement" are often synonymous and have gotten out of control in today's society.  What I am saying is that, from a customer service standpoint, I found it interesting that simple and easy gestures were not made to prospective clients to make them feel more welcome.  And, because the continual improvement of customer service is something I think about a lot, I found my self not paying attention to the seminar but rather thinking about how I -- and my company -- can do a better job with our customers and prospective clients.

So let me finish with this thought.  Whether you're working with us for the first time or the tenth time, we want you to know that you're respected and valued and will extend the most basic of common courtesies and old-fashioned manners.  Figuratively speaking, we will look you in the eye and return a firm hand shake.  We will hold the door open for you.  And we will find you a place to sit.

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Should Damage History Scare You Away?

It’s inevitable that some airplanes will experience some form of damage during their lives.  It could be as benign as accidentally pushing a plane into the back end of a hangar and causing some minor rippling of the elevator skin to a full-fledged gear-up landing that caused a prop strike, bent firewall, and substantial damage to the underside of the aircraft.

Following the event, assuming the aircraft wasn’t written off, repairs will begin. Obviously, the shop you choose for this task is of ultra-importance.  How much experience do they have?  Have they fixed this type of damage before?  Do they know how to work on the subject airplane?  What kind of documentation will they provide?  These and other questions must be asked and satisfactorily answered before committing to one shop over another. 

General aviation repair stations are not created equal.  Some shops do fantastic work and well, there are the others.  Some provide extensive documentation while others minimize the write-ups and just cover the basics.  In many cases, as an aircraft owner – and future seller – how the aircraft log book write-up is made should be as important as the actual work itself.  Ask for thorough and complete documentation so that there is no question as to how the repair was performed. 

If you’re a buyer you should look at repair documentation carefully too.  But – because many airplane buyers are a little gun shy – they often look at the repair documentation in the wrong light.  They believe short log entries equate to minor damage and repairs and that extensive documentation means the plane suffered substantial damage.  Nothing could be further from the truth.  Let me repeat that – nothing could be further from the truth.  In fact, I would go as far as to assert that if the write-up is short and leaves out detail the shop may be trying to hide the extent of the damage.  And, if they take the time to give a lot of detail to the work performed, materials used, and processes followed, they are showing that they believe in the quality of the repair and have nothing to hide.

So, if you’re looking a plane with prior damage history, make no assumptions about the quality of work performed.  Read the documentation carefully, call the shop that made the repairs and ask lots of questions, and have the mechanic you’re using for the pre-purchase inspection spend quality time reviewing the repair and documentation.  And should you come across a well-documented repair be thankful that the shop performing the work paid attention to the details.

What do you think?

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