““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 ”
How to Buy a Business Jet
Buying a corporate jet during times of worldwide financial turmoil might be considered by many to be one of the more outlandish business moves you can make. It could also prove to be one of the smartest.
The current fiscal climate hasn't changed the fact that a well-utilized business jet is far more than an elite perk. Rather, it can be one of the most effective and efficient weapons in your corporate arsenal. So assuming your source of funding is still available (which it probably is, since you're reading this), the world's economic state has got you, the jet buyer of today, sitting in the catbird seat. A lot has changed in the jet-buying scene-new and preowned-over the past 18 months and understanding the nuances of exactly how and where the market has turned upside down can help you leverage your purchase decision.
Some things have not changed and never will. The elements of buying a jet are still unlike those of any other kind of financial transaction you have ever made. On one hand, you are negotiating the purchase of a complex, high-priced asset. Think as though you are investing in a new factory or acquiring a major technology platform costing millions- even tens of millions-of dollars. But it's more than that. You're also adding a self-contained "travel division" to your company (or your personal life), introducing essential personnel from an entirely different industry and becoming deeply involved in unfamiliar infrastructure (airports and the airway system). Finally, you're making one of the most ego-feeding purchases you might ever be involved in. Just keeping your emotions in check throughout the process can require a major effort.
To get started, you could simply Google the Web sites of all the major business jet manufacturers and ring up the salespeople representing your region. But chances are, you'll instead start the process by seeking advice from friends and colleagues who operate jets. They're likely to refer you to their trusted consultants or management companies. That's a good first step.
It makes sense to audition several of these experts to ensure you have a good fit. Today, when it seems you don't buy an iPod without expert guidance, there's no shortage of fee-based advice available when it comes to acquiring a business jet. You ought to shop widely enough that you feel comfortable and confident with your choice.
What also has not changed in choosing the right jet is the need to define your mission as clearly as you can. While your pal in the next slip at the marina might loudly praise the value and efficiency of his company's small or midsize jet, you might find that your needs involve carrying more passengers longer distances-and the cabin size and range of the smaller airplane just don't make sense for your day-to-day operations. But getting carried away with impressive speed or range statistics could lead you astray, as well.
Gil Wolin, a spokesman for JetDirect, a well-known aircraft management firm, shared this rule of thumb on mission definition: "Most buyers target using their own airplane to fly 80 percent of their missions and use charter for the rest." That could mean owning a smaller airplane for most of your travel and chartering large-cabin jets for international trips. Or the opposite-owning a large, long-range jet, but chartering smaller jets, even turboprops, for occasional short hops. Enlisting the services of a large management company can further facilitate right-sizing your travel needs. So understanding the nature of this purchase and defining the specific mission hasn't really changed as a result of Wall Street's version of "crash and burn."
New or Not
Whatever the mission, there is always the question of factory-new versus preowned. That's one area where the recent fiscal meltdown has had an impact on your choices. In the few years leading up to the collapse, long factory backlogs for new jets helped maintain high demand for preowned aircraft. In some cases, a low-time preowned jet sold for more than a new one of the same model because the buyer could be flying in days, rather than years. Among the most telling signals of a down cycle for business aviation is when the availability of low-time, late-model jets begins to rise. And that pendulum has swung wildly in the direction of a buyer's market. In what is considered a level state, 10 percent of the business jet fleet is being shopped on the used market. That figure dropped to as low as 4 percent in recent years, but currently it sits at around 16 percent of the existing fleet.
If your due diligence leads you down the preowned path, there will certainly be a pre-purchase inspection in your future. Some trustworthy bets for handling the job include factory-owned or authorized service centers. Bear in mind that most of the "inspection" will involve poring over maintenance records because almost every time a part is installed or a wrench is turned on a jet, someone is looking over the technician's shoulder and logging the event. One key selling point for preowned jets is whether or not they are involved in a service plan, in which a single monthly and/or hourly charge covers all maintenance- planned and unplanned. Such programs take much of the guesswork out of the budget and add value to the aircraft when it comes time to sell.
Whether it's new or preowned, what also hasn't changed is the need to arrange for the care and feeding of your jet once you decide on the right one. There is a long checklist of to-dos in establishing a safe, legal and fiscally prudent flying operation. What you have to figure out first is how directly you want to be involved in handling a wide variety of matters, including financing, insurance, tax issues and accounting, hiring pilots and support staff, initial and regular recurrent training for pilots, maintenance, hangar space, fuel purchases, flight planning and arranging over-flight and landing permits for international travel. Some prospective owners are comfortable handling one or maybe two of these areas, but not the rest; for example, if your field is finance, you might have an inside track on where and how to find the funding for your jet and how best to make your peace with the IRS.
A few buyers try to take on the responsibility for everything, which often winds up being more than a full-time job. For example, renting hangar space-or buying your own hangar-involves you in the highly specialized area of airport real estate. There are elements of that specialty niche that can turn around and bite you even if you're otherwise quite savvy in the commercial real-estate game. So be careful about taking on elements of operating your jet that might, on the surface, appear to fall within your comfort zone, but upon reflection will not.
With all those considerations on the table, it's probably safe to say that most jet buyers these days lean toward turnkey service from a management company. That way, all your due diligence is focused on a single business entity. Plus, there is only one check to write each month, which, in itself, can save a bundle on administrative costs and headaches.
Once you've found the jet of your dreams, it comes down to the old saying, "You don't get what you deserve-you get what you negotiate." Some key points in this realm have changed markedly in the past several months, and those changes are almost all in your favor as a buyer. Business jet manufacturers had been riding an unsustainable high, according to Sparta, N.J.-based aviation consultant Brian Foley. "The changes started in the U.S. about a year and a half ago," Foley said.
Drew Callen is the founder of Boston JetSearch, a fee-based buyers-only service. Callen will help you buy a jet but will refer you to a third-party broker if you want to sell it later. In his view, this philosophy ensures his clients will trust his recommendation to be untainted by any temptation to sell an aircraft for which he stands to collect a commission. With some former customers having tried to lure him with rich commissions, Callen has a perhaps odd view of his own business plan. "Nobody else is as stupid as this," he said, "but it's been working for us for 25 years."
From that perspective, Callen stressed the need for keen awareness of the most current market issues, whether buying a new or used jet. "The shelf life of research is very short in this market," he said. "What was good data six months ago is old news now. The big issue is to take the time and the effort to become the most knowledgeable buyer you can, whether it's via in-house research or through a consultant."
Foley agreed. "If you're a buyer with the ability to pay," he said, "time is on your side."
Some Factors in Your Favor
The increasing number of available used jets was the first sign of the faltering business jet market, according to Sparta, N.J.-based business-aviation consultant Brian Foley. As of last November, he said, the number of used aircraft for sale was up by some 30 percent over the same period in 2007. He also noted figures indicating that aircraft charter activity was down 20 percent in the third quarter of last year compared with the same time frame in 2007. Also, he said, jet-fuel sales (not including those to airlines) and FAA numbers for business jet operations showed significant decreases.
A spokesman for management specialist JetDirect, Gil Wolin, pointed to the state of the charter market as a measuring stick for prospects for new aircraft sales. With charter activity down, would-be buyers of smaller jets will find themselves harder pressed to sustain their operations, Wolin explained. "The smaller the jet," he said, "the more likely the owner is dependent on charter revenue to justify the cost of keeping the airplane." He cited a ratio of three hours of charter to one hour of owner-occupied flight as the standard for smaller jets whose owners choose to make them available for hire. When sales of smaller jets falter, they become even more attractive to position holders of larger jets who want to downsize their investment. So no domino falls without tumbling at least some of its neighbors.
Position Buyers' Bets Have Cashed In
As evidence of how much has changed in the aircraft acquisition scene, aviation consultant Brian Foley cited the unusual phenomenon of position speculators-risk takers who place an order on a jet they never intend to buy, hoping to sell the delivery position to the highest bidder as backlogs stretch out beyond the visible horizon. Over the past few years, "irrational enthusiasm" caused some buyers to pay as much as $20 million in early-delivery premiums, and legitimate buyers were posting orders for three jets when they intended to take delivery of only one-to help offset their capital expenditure with some easy cash.
According to Foley, some delivery positions changed hands four times before the jet even rolled out of the factory and speculators did pretty well.
But those who got greedy lost the gamble. Manufacturers protect themselves from a rash of cancellations by incorporating "progressive payments" into the sales contract for a position in their backlog.
The manufacturer collects, say, 5 percent of the purchase price at contract signing; 5 percent more 36 months from delivery; 10 percent more at two years; 20 percent more at one year; and another 30 percent at six months, said Foley. In other words, if you back out of your deal six months before scheduled delivery, you stand to lose 70 percent of the purchase price of the jet outright. Most manufacturers, he said, find it in their best interest to work with buyers in financial distress-stretching out delivery schedules, for example, or putting them together with other buyers who want to move up in line, but then the leverage is in their favor.