Jet-Powered Speculation

Business Jet Traveler » February 2014
Tuesday, March 4, 2014 - 1:00pm

A recent CNBC news item noted that Formula One racing tycoon Bernie Ecclestone “flipped” his new G650 just weeks after he took delivery. An Asian industrialist who didn’t want to wait out Gulfstream’s order backlog for the popular new model bought it for $72 million—$7.5 million more than the list price. The report quoted a blogger who wrote that “the plane was too large for some of Ecclestone’s favorite airports.”

I say…propwash. People who advise the VIPs who buy business jets—you can bet Ecclestone had professional help—don’t make mistakes like that. I’m willing to bet a left-handed lug nut from one of his cars (which is about the only part of them I could afford) that it was the smell of $7.5 million that sealed the deal, not a sudden epiphany about airports the Gulfstream couldn’t use. (Keep in mind that the G650 has impressive short-runway performance numbers to go along with its jumbo cabin and Mach 0.925 cruise speed.)

Television shows have highlighted real estate dabblers who turn a profit by “flipping” houses—buying rundown properties on the cheap, then sprucing them up at minimal cost and remarketing them for a substantial profit. The CNBC report implied that buyers holding contracts on new business jets are cut from the same cloth, but that’s not really accurate, especially with early adopters of developmental models such as the G650.

Ordering a not-yet-certified jet isn’t as simple as signing on the dotted line for a dilapidated house. It’s a multistep process, more akin to negotiating a deal with a contractor to build a factory or office building. There’s an upfront ­payment, followed by a graduated series of “progressive” payments pegged to project milestones. For example, a payment of, say, 15 percent, might be due when the prototype flies for the first time or when the airplane receives its certification.

The length of the order backlog offers one measure of the health of a new-airplane project. Sometimes, the first few years of production may be spoken for before the prototype even flies. But the development process could take several years, and in the interim, a lot can happen—to the new-airplane program but also to the fortunes of the contract holder—that affects the original deal. For example, demand for the jet could skyrocket, and the buyer could be bombarded with offers for “his” airplane even before it rolls out of the factory. Or maybe the buyer’s company falls on hard times and has to divest at a disadvantage.

For the manufacturer, this is a double-edged sword. On the one hand, contract holders flipping their delivery positions represent a testament to the popularity of the new model. But the other side of the coin is the negative image of buyers “selling out” their interest in the new airplane. In the worst-case scenario, such buyers might have been cited in high-profile ads or other promotional campaigns. At the very least, salespeople pitching other customers may have shared in discreet conversations with their own prospects that “Mr. So-and-so is buying one” (but only with Mr. So-and-so’s approval, of course).

The other downside for manufacturers is that they still view an established customer flipping a jet as a sale gone wrong. They see the original buyer as bailing out of the deal and regard the secondary buyer as a former potential order holder who is now off the list of prospects. And all the multiple secondary negotiations on finance, warranty details, maintenance arrangements and myriad other details must start from scratch. So manufacturers don’t view stories like the CNBC report as good news.

As a result, business jet makers have “non-assignability” clauses in contracts to discourage customers from acting like spec buyers and selling their positions. It’s written into the deal that the original buyer must be the one who takes the keys. 

But that photo op sometimes disguises the reality that the secondary buyer is lurking out of sight of the cameras, itching to go for a spin in his new ride.


Mark Phelps (mphelps@bjtonline) is a freelance writer and private pilot.

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Quote/Unquote

““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”

-David Yermack