““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 ”
Buying and selling jets with a checkered past
They don't come to market wearing a scarlet "A." But some business jets have a past that can make potential buyers view them as damaged goods-and greatly reduce their resale value. Their flaws, in the eyes of shoppers, may include relatively high airframe time, corrosion, foreign ownership, missing or incomplete logs and damage history.
Their impact on resale prices aside, some such factors may have no effect on an aircraft's performance, operating cost or longevity.
"There is operational reality and there are realities of perception," noted James Markel, board chairman of the National Aircraft Resale Association and chairman of San Francisco-based Apex Aviation, an aviation consulting and aircraft brokerage company. Whether the problem is real or imagined, Markel said, "most buyers will stay away from that type of airplane," lowering demand and thus the price of these jets.
Sellers need to understand these factors, so they can address problems before they put their aircraft on the market-and so they can get a dose of reality about what their jet is worth.
"Realistic asking prices are a hard part of the education process," said George Marburger, a managing director at Jeteffect, a business jet brokerage in Long Beach, Calif. [Jeteffect's managing director, Bryan Comstock, writes the "Preowned" column in this magazine.-Ed.]
Buyers, meanwhile, can use the perception vs. reality equation to find bargain airplanes that the marketplace may have unfairly discounted. In fact, given the illusory nature of many such flaws, some aircraft brokers and dealers say these issues are often more red herring than red flag.
"I wouldn't call them 'problem jets'-they're 'opportunity jets'," said Mark Foulkrud of Avjet Corp., a Burbank, Calif. jet sales and charter company. "Some aircraft have different issues as they go through their life. You just have to buy at a price that doesn't hurt you later."
Here's a look at some of the key factors that make buyers wary-and sometimes lead to bargain pricing.
The number of hours an airplane has flown has a dramatic impact on its aftermarket value, and owners of relatively high-time jets pay the price when they sell. Why? Brokers and dealers say buyers mistakenly equate low-time aircraft with low-mileage
automobiles, ignoring the continuous maintenance and inspections that assure an aircraft's airworthiness.
"We're selling a [Gulfstream] GIII for $4.995 million," said Pat Janas Jr. of Private Jet Trading of Herndon, Va., which specializes in preowned long-range business aircraft. "It would be $5.995 million if it had 12,000 hours instead of 18,000."
Industry professionals can provide average ranges of airframe time for particular makes and models. They suggest that owners of high-time jets invest in improvements to counter buyers' reluctance. "You try to offset those negatives with better paint, new interior, incredible maintenance," said Foulkrud.
Other factors to consider: a relatively low number of takeoffs can compensate somewhat for high total time. And a high-time aircraft at a Fortune 100 company will be penalized less than one used for charter; buyers would likely consider that the former received better maintenance and less wear and tear.
If you're an owner who uses your jet heavily, you might consider selling sooner than you otherwise would, keeping time on the aircraft within averages for the vintage. And if you're a buyer who intends to put relatively little time on a jet, you might purchase a high-time model at a discount and sell when low usage has brought its total time more in line with averages, reaping the rewards of a rebound in value.
For buyers, high-time aircraft can represent real value. Most business jets are built to air transport standards (Federal Aviation Regulation Part 25), as are airliners. And with a service life of around 60,000 to 70,000 flight hours, a 20,000-hour jet flown 700 hours per year-considered high usage-has more than half a century of life left.
Another reality to consider is that major inspections are performed on aircraft at specific intervals. An 11,000-hour aircraft has been through its 10,000-hour inspection, and discrepancies have been addressed. An 8,000-hour airplane of similar vintage might be more attractive to the market, yet it will have to undergo a major inspection and the possible costs of replacement parts in just 2,000 hours.
"We certainly have run into the situation where people have purchased an 8,000-hour airplane instead of a 10,000-hour airplane for all the wrong reasons," Markel said.
Damage history also cuts resale values, with the amount depending on the damage's severity and age. (The market penalizes old damage less than new.) The good news for owners trying to sell jets with such history: the selection of undamaged aircraft on the market is slim.
"Very few haven't had hangar rash [damage caused while moving aircraft into or out of hangars] or a lightning strike," said Marburger of Jeteffect.
Damage is often minor, such as when winglets get dinged on crowded tarmacs, tugs run into airstairs or hard landings damage landing gear. But even when damage is minor, owners should repair it to protect resale value. And for some smaller damaged parts, replacement can make more economic sense than repair, even though it's more expensive, because it eliminates a paper trail of the damage.
"Today, it seems more cost effective to take a whole assembly off and replace it, circumventing the [FAA Form] 337 filing requirement [for major repair and alteration]," said Dennis Rousseau, who owns AircraftPost.com, a subscription-based Web site that tracks medium- and long-range business jets for sale. "You repair it, you're screwed as soon as somebody sees the 337. The perception is, 'Whoa! This aircraft has damage history.'"
Some repair stations issue a Form 337 when they replace parts, as well as when they repair them, so inquire about paperwork beforehand.
Also, because the market penalizes new damage more than old, owners should avoid selling a recently damaged aircraft if possible.
The biggest value hit comes from repairs that use non-original parts or that require ongoing inspections. You should avoid these repairs, as they can severely depress resale value.
And make sure the airplane is painted properly after damage is repaired. Marburger recalls damage to a Gulfstream cowling. "When they painted it, they didn't match the colors. [Potential] buyers asked, 'What happened to the cowling?'"
Corrosion can seriously depress the value of an aircraft, and if severe, can threaten its structural integrity and require considerable time and expense to correct. But corrosion is also common and often innocuous.
"All metal is subject to corrosion; it starts on new airplanes when they come out of the factory," said Markel. Some people who are not sophisticated get upset when they get a report of corrosion in an aircraft they're considering and they race off to tell the boss. Then everyone gets upset, as if the wing were falling off, but corrosion is normal, he said.
Some sales professionals contend that facilities that conduct prepurchase inspections use the specter of corrosion to create business for themselves, to the detriment of sellers.
"I've seen many pre-buy inspections where the report indicates corrosion, but you have to use a magnifying glass to see it," Foulkrud said. "There's no structural safety issue, but the manufacturer says you can't have any corrosion. For a buyer it's wonderful, you're getting everything cleaned up like new, but as a seller you're getting cleaned out."
Foreign-registered jets also face discrimination in the marketplace. The perception is that they don't receive the same level of care as those in the U.S. However, according to brokers and dealers, the majority are maintained by factory service centers. Owners of foreign-registered aircraft who are concerned about resale values should assure that their jets are well maintained.
For potential buyers, the logs provide the paper trail on where and how the aircraft has been serviced. And a thorough inspection will uncover any issues the logs don't reveal. Nonetheless, "it costs time and money to evaluate airplanes," said Brett Forrester of General Aviation Services, a business jet broker and dealer in Lake Zurich, Ill. Thus, all else being equal, U.S. buyers would rather evaluate a U.S.-based aircraft.
And the marketplace considers some aircraft more foreign than others. "An airplane coming out of Nigeria, for example, is more suspect than one coming out of the UK," Forrester said.
Buyers also tend to consider multiple owners a negative, as that can make it tougher to establish the history and care of the aircraft. "Each operation has its own way of recording maintenance," said Rousseau. "A single owner makes the paper trail less cumbersome to follow. It's nice to be able to get from the current owner a history that extends back several years."
Said Foulkrud: "Good logbooks sell your airplane. Not bad or good news, but complete and up-to-date logs in English. That's essential to the premium price of an airplane." Indeed, incomplete logs can reduce aircraft values 10 to 30 percent, according to sales pros, and may make a sale impossible.
Incomplete or Missing Logs
Subsequent use of an aircraft without complete logs is also affected. Incomplete logs are especially unacceptable for a U.S. operator that wants to place a jet on an air carrier certificate to generate revenue.
"Any airplane on an air carrier certificate must go through FAA conformity inspection," Rousseau noted. "Buyers need to know time and cycle on each component. And without the logbooks, there's no way of knowing."
Logs can be reconstructed, but it's a long, costly process. All facilities that have performed maintenance or inspections must be contacted, and they in turn have to search work orders and other records. Sometimes owners don't even realize logs are incomplete until they try to sell the jet. As it can take months or longer to reconstruct missing logs, owners should have logs reviewed well before they're ready to put their airplane on the market.
If you know your jet has "problems" factors, disclose them to sales reps and potential buyers. And if you don't know whether any such issues affect your aircraft, have it inspected and correct squawks before you put it on the market. "Don't let it go into prepurchase inspection if you know something is wrong," Rousseau said.
Additionally, besides an aircraft's unique history, all makes and models are subject to their own idiosyncratic problems-areas where corrosion may appear or parts that are apt to become damaged. Both owners and buyers should work with professionals knowledgeable about the particular model they are selling.
For buyers, Marburger said, "The long and short on values is, you make your money when you buy the aircraft; you're not going to make money when you sell it. There are sophisticated buyers, and there are buyers who get put away on the front end because they didn't do the research."
Foulkrud summed up: "Get people to help you who know the problems with [the model you're buying or selling]. We always say the guy with the most knowledge wins."