Crystal Ball for Business Aviation in 2019

Crystal Ball for 2019

First a little pat on the back, our 2018 projections were fairly accurate.  We are seeing interest in new models and customers upgrading to these new models.  There is less late model high quality aircraft for sale.  Prices have stabilized or in some markets shown slight increases.

What is the outlook for 2019?

We feel that 2019 will continue to see demand for new models.  The low production levels from earlier in the decade are being felt in the market place.  In some cases, the aircraft you might want to upgrade to as a 5 year or newer model, might not exist on the resale market and you will need to consider a new plane to meet your requirements.  New models are offering significant improvements in their respective categories, from increases in performance to perhaps more significantly, improvements in interior comfort.

Positive items for 2019 will be a continued strong economy.  The OEM’s have and do not appear likely to make large increases in production hedging against any economic headwinds.  This will continue to increase high quality aircraft demand and will result in more, albeit small, price increases.  We also see a large number of older aircraft that will miss the ADS-B equipment mandate and be parked.  This hopefully will stimulate demand in older aircraft that have been upgraded to the new mandates.  Could we see some small price increases in older aircraft that meet the new requirements?

There are potential negative items lurking for 2019.  Demand is staying relatively flat in the US.  This market is still around 70% of the total aircraft market.   Any decreases in the US are felt hard in a world market with tepid demand.  Any backsliding in the other world markets, even as a small percentage of the total will be impactful.

July 2019 will mark the longest economic recovery on record.  Economists do not believe it can continue forever.  Most people think there will be a slow down, the question is will it be 2019 or 2020 or later.  We think that the economy will feel the slow down in 2020.  The US election will paralyze business decisions with the risk of a highly polarized campaign for President.  However, unlike some recessions, we do not feel it will be as severe and will not have as big of an impact on the aircraft industry.

Scheduling pre purchase inspections and upgrades to your new purchase might take longer.  Maintenance facilities are at capacity doing upgrades for the ADS-B mandate plus many operators are taking the scheduled downtime to do other heavy maintenance or upgrades.  Combine that with an aging fleet that takes more shop days and you have quickly used up the maintenance facilities shop capacity.

For many years we have heard of the upcoming pilot and maintenance technician shortage.  It is here and is real.  Corporate flight departments will be faced with increasing competition from the major airlines.  The airlines are struggling to find enough pilots to continue their growth. Finding high quality aviation personnel will be an issue for corporate aviation.

Historically, the hardest felt drops in the aviation market have come from years where we saw a run up of production.  Since demand for new aircraft has remained fairly steady over the last 7 years, and the OEM’s are not eager to overproduce we think any setbacks in the economy will not be a catastrophic event and will be a small bump in the road. The new models will help keep this more stable as well.

The market you are experiencing today is the aircraft market until we see some outside increase in demand.

Sorting out Rationality in an Irrational Market in the Used Aircraft Market

Presented by Mike McCracken at the Corporate Jet Investor Conference Miami 2018

In the standard economic model, markets should perform rationally.  The assumption is that buyers and sellers act rationally.  In those cases where the market gets out of synch, the economic theory is they will quickly get back to equality.

All of us in this room know this is not the case in the aircraft market. Buyers and sellers do not act rationally.  The results are a market place with fluctuations in price that are anything but rational.

The field of behavioral economics got its start in the late 60’s and has gained ground ever since.  It helps model real economic behavior versus theoretical rational economic behavior. It is so important that Dr. Richard Thaler won a Nobel prize in Economics for his work in this field.

These economists teamed with the fields of psychology to come up with new models that better explain the real workings of the market place.  They could have saved a great deal of time by starting their studies in the aircraft marketplace.

The following is an example from Misbehaving by Dr. Richard Thaler that we can all relate to.

Suppose you bought a case of good Bordeaux in the futures market for $20 a bottle.  The wine now sells at auction for about $75.  You have decided to drink a bottle.  Which of the following captures your feeling of the cost to you for drinking the bottle? Now take your devices and vote for the one that matches your thoughts.

  1. $0, I already paid for it
  2. $20, what I paid for it
  3. $20 plus interest
  4. $75 what I could get if I sold the bottle
  5. $55, I get to drink a bottle that is worth $75 that I only paid $20 for, so I save money by drinking the bottle.

What is the correct answer according to economic theory? According to economic theory the answer is $75 since the opportunity costs of drinking the wine is what it is selling for.  A true econ/rational buyer would choose this answer and most economic theory is based on this.  The above question and survey was given to over 170 professional economists.   Here are the results:

  1. $0, I already paid for it (30%)
  2. $20, what I paid for it (18%)
  3. $20 plus interest (7%)
  4. $75 what I could get if I sold the bottle(20%)
  5. $55, I get to drink a bottle that is worth $75 that I only paid $20 for, so I save money by drinking the bottle. (25%)

Even most of the professional economists did not act according to rational economic theory!  Our results today were:

How about sunk costs?  How many times have we seen an emotional component to the sales price a seller is willing to take because he feels he is losing more money than he thought he would in real depreciation terms?  Even though the next plane is selling at a similar discount?

In the appraisal world, by definition the market value of the real property is:

Current Market Valueis the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. (Treasury Regulation Sec. 20.2031-1[b])

The components of this concept are:

  1. Price at which property would change hands
  2. Between a willing buyer and willing seller
  3. Neither party under compulsion to buy or sell
  4. Both parties having reasonable knowledge of all relevant facts as the valuation date.
  5. The sale is made to the ultimate consumer in the appropriate market level.
Market Value is similar to Current Market Value except that the provision for lack of compulsion to buy or sell is removed, and the assumption of a sale within a specified time frame is added.

The federally accepted definition of Value as stated in the Definition Section of USPAPis as follows:  a type of value, stated as an opinion, that presumes the transfer of a property, as of a certain date, under specific conditions set forth in the definition of the terms identified by the appraiser as applicable in an appraisal.

  1. Both parties are well informed or well advised, and each acting in what he considers his own best interest
  2. A reasonable time is allowed for exposure in the open market
  3. Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  4. The monetary amount represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

The primary value assumptions are fraught with rationality issues.  The reality as we all know, is most often there are not equally knowledgeable buyers and sellers.  They also have hidden agendas that sometimes even the buyer’s agent or selling agent are not fully aware of during the sale.

In my opinion, what further complicates this, is determining what values really add value to each buyer and seller.  An example:  does WiFi GoGo add value?  Well it certainly does to a US buyer.  It is worth the parts only to a buyer in other region of the world.  So, what is the correct appraisal valuation for an aircraft that has a piece of equipment that is not of any value to the buyer?  Or what is the value expectation for the seller?

How do you account for the transaction cost?  Transaction costs should not be a part of the valuation, however in the real world of the marketplace they are a very important factor. What is the cost of getting an aircraft from China or India to the US?  Sales comparisons can become quite misleading without understanding some of these factors.

When you look at transactions, how do you determine whether each party is knowledgeable?  Do you know that the seller has a use for the capital and needs it off their books to use the capital for something else.  That might lead to a compulsion to sell.  Or a buyer who has a capital approval for the calendar year that will go away or have to go through the approval process if not utilized in the year it was approved.  Compulsion to buy?   Taken to an extreme, two new interiors, one done in grays and blues, one in beiges and tans.  On paper both are equal, however to the buyer, the emotional component of meeting the tastes of the buyer, might make one aircraft value plus or minus the price of an interior.

The results are the prices in the marketplace are not a rational representation of the market.

Property that has higher volumes and more of a commodity lessens these impacts.

Money markets are a good example.  A dollar is a dollar and does not have an emotional component in the transaction.  It is a commodity, it trades in large volumes.  There are many items that trade in high volumes and while they might have some individual emotional component, like a house in a particular neighborhood, the volume of the transactions minimizes the effect of outliers.

The airplane market does not have many of the assumptions that traditional economic theory is based on, and the results are valuations that can be widely divergent.  The volumes are very low and given that some aircraft models might have 20 or so trades per year or even less within close model year approximation, the results can become very subjective.

The back to back market exists in large part to middlemen taking advantage of these market inefficiencies.  If the market was truly efficient as economic theory suggests, there would not be an opportunity for someone to make a market by doing a back to back.

In my opinion, this is one reason that back to backs hurt the market.  They are adding distortions to a market that already has many distortions.  A stocking inventory dealer is a different consideration.  They actually buy the asset and have a financial risk associated with the purchase.  They represent the wholesale value.  The spread is the risk/reward for doing the transaction.

This is very different than the typically back to back where there is little or no risk,  and the spread can be large by taking advantage of the lack of knowledge in the market.  Some would argue, that the middleman is just using a form of arbitrage and should be rewarded for his knowledge in the market.  The buyer and seller get a price they were both satisfied to receive.  No harm no foul.  If the transaction has full transparency, then both parties should not have an issue with the transaction costs.

The problem becomes when the middleman tells two stories and convinces one party that this is the maximum price in the market, and the other party that the higher price they are paying is the going price for a good deal.  If that is within normal brokerage fees, both sides will more than likely, if they find out, not have much of an issue. However, when the fees for a little transaction risk far exceed the norms, then the market becomes distorted.

In the above example, what is the real market price?  One aircraft results in two different fair market prices.  In theory, this cannot happen.  Were both parties knowledgeable?

What happens when someone without a brokerage agreement finds an aircraft and the seller advises they want X for the aircraft.  He wants to make a large fee for finding this seller a buyer, and then tells the market that he has an aircraft that can be bought for Y and Y is significantly higher than X.  The market now sees a high asking price on the aircraft .  Is this the market or is this just a dreamer?  Depending on how the middleman handles the situation by keeping a much higher price on the aircraft, than the seller is willing to take, the aircraft might languish on the market.  The market looks slow, nothing is selling.  No offers are forthcoming.  The seller could have perhaps sold the aircraft in much less time for a good price and very near his expectation, but due to an aggressive middleman wanting to make an abnormally high fee, the aircraft sits on the market place.  Is this market really slow or has transaction costs, which are not part of the valuation process by definition obscured the real market value?

This happens often and I had it happen last year on a Falcon 2000LX.  The aircraft was not yet on the official market waiting on the new paint job.  We decided not to advertise until we were market ready.  We only responded to solicitations of people wanting to buy our aircraft that approached us directly.  I was quite surprised to discover my aircraft, that we were going to ask in the high $13’s, was being bantered about in the market for the mid $14’s.   It was not a mid $14’s market.

Irrationality exists in all markets.  It is more predominate in ones with low volumes and lots of valuation variables.  Prices are not public knowledge and the ones that do make it into the knowledge base might be widely divergent based on the unknowns in the transaction.  It is important that buyers and sellers arm themselves with reputable brokers.  Brokers who mislead buyers and sellers with pricing variations to accommodate a larger than normal transaction fee, do not build trust in our industry.  In a small volume, small world, word gets out and it is only a manner of time before both the buyer and seller have a very good idea of the true price.  However, even in this example, buyer and seller may not be able to fully understand all of the variables that resulted in the outcome.

The bottom line is that the aircraft market is a prime example of human behavior rather than pure economic theory effecting market values. Non-rational actions impact prices.   Once you accept the irrational behaviors as the normal behavior, you will better understand the variances in the market.  Using professionals to help weed through this irrational component can help make sense of values and place them in the proper context.   The more the market place is represented by ethical and knowledgeable buyers and sellers, the more accurate the valuations will be.

Data driven valuations from reputable appraisers are a good starting place, however, it takes more than data to understand the actual valuations and that is where interpretation expertise comes into play.



The Throw Away Jet

As Published in BusinessAir Magazine

The current used jet market has reached the stage where a relatively high percentage are in the throw away jet category.  In general terms, it happens around age 30+-.

Let me explain.  This age of aircraft is in the functional obsolescence stage of their life.  The deterioration in their value is related to their increased operating costs, downtime, lack of parts support and efficiency.

In many cases they still have a physical life.  They are not eaten up by corrosion or other outside physical detriments that make the plane useless.

They have economic life as they still meet the regulations within the environment they need to operate in. They are able to be upgraded to ADS-B and can fly in the airspace.

So by far the largest contributor to their demise is functional obsolescence.  The cost of major maintenance is greater than the value of the plane.  Another way to look at this is, anytime the cost of the plane is made up of 50-75% of the cost of major maintenance, you are functionally obsolescent.

The question becomes, at what point does it make sense to keep putting dollars into a piece of equipment that a majority of the value is the maintenance that was just done?  Some would argue that if the cost of that maintenance is less than an upgrade to a later model aircraft with similar missions, then it is justified.  If downtime and potential parts issues are not a concern, then they might have a strong argument.

The other way to look at this is to buy an aircraft that someone has spent the money on, and just fly to the next major inspection.  Thus the throw away jet model.  The real depreciation is the initial purchase price plus the routine cost of maintaining the aircraft less the salvage value before the next major maintenance event.

Some aircraft models that have avionics and other components that are readily available at a reasonable price are possible candidates.  Aircraft with outdated avionics or limited production runs that do not have a good source of parts might be ones to stay away from.

There are opportunities in this market for fairly inexpensive transportation.  You just go into the purchase with the idea you are the last owner and the next stop is the graveyard.  With over 18% of the installed base of aircraft that are 30 years or older there certainly are and will be many opportunities.

We recommend doing a thorough analysis to understand the costs and limitations of this type of plan.  An AD on the engine, as is the case on the 731-4 and -5 models, could make your throw away jet obsolete much sooner, if not on an engine program.  While the throw away model might seem attractive, you possibly could have had a much better alternative for similar out of pocket costs.  It is wise to do a detailed analysis rather just winging it.

Finally, these planes may be inexpensive to purchase, however they are not inexpensive to take care of properly.  Buying a cheap jet and then being cheap on maintenance is a recipe for disaster.

Mike McCracken


Hawkeye Aircraft Acquisitions

[email protected]

Planning for your next business jet purchase

As published in BusinessAir Magazine issue 10 2018

If you are keeping up with the market trends you are becoming aware of a market dynamic we have not experienced since before 2008.   In most markets, you can’t just wake up and decide to purchase an aircraft and assume you can get one in service within a couple of months.

The market has turned from over supply to a reduced supply and in some models, a tight supply of quality aircraft.   Barring any outside disruptions, we see this continuing for at least the next few years if not longer.

I have written previously about how the number of aircraft built since the 2008 crash, is substantially lower than the years preceding 2008.  OEM’s reduced supply trying to match the tepid demand.  Owners kept their planes longer resulting in even high quality aircraft having more hours because they are trading later than initially planned.  The results are fewer late model low time aircraft.

If you are buying used, you will need to be both patient and ready when the right plane comes along. It will take planning to know what you want, the parameters you are willing to accept and the budget you can live within.

If you are a flight department manager, it is critical to let your executives know that it could take several months to place the new aircraft in service.  It might take months just to find one that meets your criteria.  If it requires added equipment, paint and interior the process can be extended 2-3 months providing you can find a shop to do the work.  If you are an executive, you need to plan for this longer time period and get your acquisition team together in advance of the go ahead to buy.

On the new side we are starting to see some backlog build.  There will not be many last minute deals because the OEM is overbuilt. If you have requirements for certain equipment and interior configurations you will need to plan on buying and spec’ing your own aircraft.  The typical OEM on larger aircraft requires at least 12 months and preferably longer to spec to a buyer’s specification.

What this means for buyers of a new plane is that if you have an aircraft coming off of a lease, mission changes or other reasons to upgrade, you need to start the process of fleet planning 6-12 months before your expected order date.  This could mean fleet planning as much as 24-36 months out before the in-service date.

On a used plane, you need the fleet planning done so that when you enter the market you can execute if the right plane comes along.  Fleet planning six months prior to starting shopping for an aircraft will go a long way in making sure you are ready.

It cannot be said enough, you also need to assemble your whole acquisition team prior to looking at your first aircraft.  Far too many times the team has not been assembled and you find the right aircraft and you do not have the right people ready to help.  The new tax laws might mean a change in the previous structure and there are a few gotchas that can upset your ability to take the full depreciation in year one.   It is far better to have all of this reviewed and in place so there are not last minute costly issues.

It is time to be a boyscout.

NBAA and the Mouse

When I moved to Florida in 1985 we learned a bunch about the state.  Things like we only thought summers up in the mid-west were hot and humid, how to outrun an alligator, and continuing the alligator theme, they have been here for a million years, you are in their backyard not the other way around—and never forget this little tip.  Another one, people perfectly capable of driving in their home states are instantly complete idiots when they come to Florida—perhaps it all of the sunshine burning out their brain cells or tropical punches.

The other more important, although not the most scientific item we learned was the economic indicator of the “mouse”.  You quickly learned after only a few years in the sunshine state that one of the better indicators of the economy was the parking lot of the “mouse”.

When I first heard this I thought it was a joke and perhaps it was intended to be a joke.  However, after many years of being in Florida, and watching the Orlando area, it has proven to be a good general indicator of economic sentiment.

Given the season, a more full parking lot indicated that on whole the economy was good.  A family going to the “mouse” or any of the other theme parks is not cheap.  Families just do not take these kinds of vacations when times are a little tight or when they are worried about job insecurity.  Serious economists would call this tracking discretionary spending. I like calling it the “mouse” indicator better.

So what does this have to do with NBAA?  The “mouse” indictor and the NBAA indicator have quite a bit in common.  Neither are scientific, but with some careful observations you can gain a lot of knowledge about the future state of the aviation market.

NBAA is always a good way to judge what is going on with the aviation market.  The amount of new announcements, the types of displays, and the look of sales people.  Do the sales people look comfortable, or concerned?  If you are good at observing people you will cut deeper than the corporate message and the optimistic talk and you will peel the onion back to a better picture of their reality.

Many sales organizations have pre NBAA meetings.  The tone of these meetings will reverberate back into the core of the sales people. Not making your numbers and the pep talks about needing a good show place stress on the team that will show up no matter how optimistic the smile is and the corporate messaging.

So when you go to Orlando this year for NBAA, observe the faces as much as the message.   Go see the “mouse” or one of the other theme parks and spread a little optimism and please if you are going to leave your driving brain at home, take the bus, Uber or Lyft.

Why You Need a Team When Buying a Business Aircraft

As published in BusinessAir 2018 issue #8

When some of you read this title you are thinking, we have done this before and hiring a team is just an added transaction expense.   We have internal counsel or a legal firm on retainer that does our other transactions or we have a firm that does our accounting.  Why do we need a specialist if our current firms do not have them on staff?

Aviation transactions have gotten more complicated every year.  While some would argue they do not need to be this complicated and 20 years ago they were far more simple, it does not change the reality of today.  Aircraft transactions have gotten more complicated because there have been cases that warrant making changes to what once were standard contracts that can add up to significant amounts of money if something goes wrong.

A couple of years ago, I had a lawyer put together a Letter of Intent (LOI).  I wanted to have one to secure a plane in case my client had not yet hired an aviation attorney.  It was done by a highly regarded aviation attorney.  I had used it a couple of times with the eventual attorneys we hired not having any issues.

Then, we were working with a client and they hired an attorney that I had worked with previously using the OEM form of LOI.  When he reviewed my LOI he said we needed to change a sentence.  I advised that sure we could do that, but I was curious as to why, since just 6 months ago it had passed with flying colors by both the buyer and sellers attorneys.  His answer is just one of several reasons to hire someone.  Three months earlier, there had been a court case involving a LOI with that same language and it ended up in a long drawn arbitration when the deal went south.

In my opinion, good aviation attorneys exist not to run up the bill, but to make sure that if there is an issue in the deal, that you are protected.  When dealing with millions of dollars it is cheap insurance.

The same goes for hiring an aviation tax expert.  This is even more critical with the new tax law as there are structure issues that you need to be careful about.  Finding out at the end of the year that by making a minor tweak to your structure you would not have lost all or a large portion of your tax deduction is not the right time.  An ounce of prediction can be worth a great deal of money.

When you hire a broker or acquisition person you are hiring them because they are a specialist.  It just makes sense to have your whole team be specialists in aviation.  If they are offering legal advice, they also should be licensed to give that advice.  Just like there are bad brokers, there are bad tax and legal advisors.  A little due diligence and you will find the right ones that are not deal breakers, but deal makers and ensure you are protected.  If all three do their job correctly, you will think the transaction was easy and that you could have done this without them.  That is when you know you had a good team.  And if it is a tough deal, you definitely will be thankful you had knowledge on your side.


How to buy a jet plane

Jet Buyer’s Guide– First time buyers

 The decision to purchase a jet for the first time or to upgrade is like any other business decision. It requires careful analysis of your needs, market knowledge, process and strategy.  Aviation can provide your company many positive financial benefits although they may be difficult to quantify.  Buying the wrong solution can often be easily recognized and results in less than favorable results.

The purchase is only a portion of the overall process.  You need to understand the operational costs and you need to have an exit strategy. All three of these will provide you the lowest total ownership costs and they need to be considered as part of the purchase strategy.

  • Budget
  • New versus Used
  • Tax implications
  • Ownership and use structure, managed or your own crew, some charter, or no charter
  • Assemble a team of aviation accountants, legal advisors, consultants and pilot/management company personnel to develop a sound business strategy to set up the aircraft and purchase.
  • The only person that has a fiduciary responsibility to you is the one you pay. A broker who gets paid from the seller is not your representative but the sellers. To have a broker or buyer’s agent work for you they need to be paid and under contract by you, simple but often overlooked.
  • Hire a dedicated buyer’s agent that is knowledgeable to assist you in selecting best aircraft, pricing and life cycle cost analysis.
  • Analyze your needs and requirements for performance and cabin comfort
  • Understand your future missions and how future regulations could affect them
  • Select Aircraft model that is best fit
  • Hangar, insurance, other operational issues
  • Market analysis of selected aircraft
  • Narrow choices to best few
  • Financing in place or pre approved prior to making offers
  • Make offers and go to contract
  • Should have crew defined, ready for training, operational requirements like RVSM in process
  • Pre-purchase inspection if used, if new completion oversight
  • Final acceptance and delivery

Hawkeye Aircraft Acquisitions is a boutique aircraft acquisition and consulting company.  We challenge convention by viewing the world differently.  Our clients experience great success and satisfaction with our different approach.  See the difference Hawkeye can make for your aircraft purchase analysis.


Fake news or has the Pre-owned market turned the corner?

Has the pre-owned jet market really turned the corner?  Recently there have been several articles and the press quoting brokers about how strong the market is right now.  Is this fake news or is it real?

For light jets up and through ultra long range jets, the transactions for the first quarter of 2017 and the first quarter of 2018 are within 1 percentage point.  That is much different than what we are hearing in terms of how active the market is.

On the flip side of the coin, the number of aircraft for sale is continuing to decline so with a similar number of transactions, it appears the pace is faster.  In my opinion this does not equate to demand as much as it does that buyers know they must move quicker as there are less choices if they miss this aircraft.

The question always comes back to supply/demand.  Supply has been reduced, however how much more demand is there?  Similar transaction volumes would indicate that demand is relatively stable.

The next question is as inventory of good pedigree planes continue to get smaller, will buyers pay higher prices, or settle for a lower quality aircraft, or buy new or just keep what they have?  OEM’s certainly are banking on buyers deciding to buy new.

This leads us back to the question in the title of this article.  Theory #1 says if demand stays relatively constant, the number of transactions are going to continue to be very similar.  We feel the pace of sales will be quicker thus making the market feel more robust than it actually is.

Theory #2 says there could be a dip in transactions as there are less suitable aircraft to purchase.   This should raise prices on good aircraft.  The question will become, if your current aircraft isn’t in the category of all boats rising on a full tide of a price increase, will you pay a premium for the model that the tide has risen?

We feel the market has made a nice gentle bend in the road.  We do not see any sharp corner upticks.  I hope I am wrong and the uptick is a wicked hairpin.

Mike McCracken


Hawkeye Aircraft Acquisitions

As published in BusinessAir Issue #7 2018

Perplexing Business Aircraft Economic Recovery


This is an article that I wrote for Business Air magazine published June 2018.

The economic recovery since the 2008/2009 meltdown has been perplexing to say the least.  I suspect that future economics students will be studying this last decade for many decades to come.

For us in aviation, it has been even more of a conundrum.  Historic forecasting models of demand, that had strong correlations predicting upturns and health of the industry, turned out to be less accurate than throwing darts at a dart board.

I think far smarter people than myself will come up with new models that include business sentiment and optimism.  In hindsight, many of the models were missing the business and political climate in the methods of weighting the results.  I also believe there is another factor that I will explain below that might help the models.

There is reason for optimism in the upcoming years.  New aircraft production was severely cut back and has still not increased by any noticeable margin.  This will result in a shortage of 10 year and later aircraft on the resale market, increasing prices.   A rise in late model prices will help new sales.  New models, that are better and more efficient than those previous models, will also help drive demand.  All of these are positive trends for our market.

I feel one indicator that we need to carefully watch is the cash to finance ratio with aircraft purchases. I am sure some of the banks have tracked this number.  I think it tells us a good story about the health of the economy and subsequently our aircraft market.

When we started to come out of the recession an interesting phenomenon happened.  We saw cash balances swell in the Fortune 500 companies as well as other business aircraft user companies.  Several reports indicated the largest percentage of cash balances in the history of tracking this number for the S&P 500.  Several large aircraft lending banks advised that their biggest competitor was not each other, but cash.  With the exception of the high number of cash buyers, all historic models were indicating a recovery, yet 10 years later we are just seeing signs of that recovery.

My theory is along with weighting forecast models with economic and business sentiment, we need to track the aircraft cash versus finance purchases as an indicator of the aircraft buying economy.   Consider the following:  One, with interest rates at historic lows, this tells us that companies did not have an investment that paid them more than the interest rate on the loan to invest their cash, and two, they were nervous about liquidity.  Both of these are indicators of an economy that is not as robust as it seemed.

When companies start financing more than paying cash for the aircraft they are putting that capital to better use in their business and they are not as concerned about a future liquidity event.  That equation might also be helpful in determining business and economic sentiment.

As we move forward, keep track of aircraft purchases using cash versus financing.  If my theory is correct, it will provide a good indicator of the strength of our aviation market recovery.

Mike McCracken


Hawkeye Aircraft Acquisitions

The New Normal in Business Jet Residual Values

As published in Business Air Magazine

Everyone is talking about the new “normal” in aircraft residual values. The first question might be to define what is “normal”. Most often the comment about normal is referenced by the term “historical normal”. What period are we talking about? Obviously, the last 10 years the historic normal is much different than the previous 10 years.

It is our belief that a misconception on residual values has been related to inflation. Residual values are primarily driven by a demand/supply equation. However, we believe that a secondary driver that can alter the perception of value expectations is the inflation rate. If you have been in the business as long as I have, you can remember the guy buying a plane for $2.0M and 17-18 years later selling it for nearly the same amount. Boy, a plane is a great investment. But, the real value adjusted for inflation shows a different story. And it is a story that needs consideration.

A couple of years back, a very popular price index book used a plane that had a value of $3.7M new in 1978 and now was selling for 12% of new at $450,000. It doesn’t sound too bad until you factor in the inflation adjustment since 1978. After adjusting for inflation the real resale percentage is 3.3% of new! Using another example, a 2000 G lV in 2005 sold for 77.5% of new, however, adjusting for inflation it was really selling for 68.8% of new.

Looking at the history of inflation rates, from 1996 to 2006 inflation went up 28.5% or on average 2.85% per year. 2006 to 2016 the rate was 18.7%, or 1.87% per year. And finally looking at 2009 to 2016 only 11.5% or 1.43% per year. (2014 to 2015 the rate was slightly negative.) In the last 14 years, the rate of inflation for the first 7 of those years was just over twice what it has been in the last 7 years.

Without any supply/demand issues in the equation, a person with a frame of reference for resale values based on 1996 to 2006 would see a reduction in value expectations of about 10% from 2006 to the first quarter of 2016. This expectation is based solely on not considering the inflation adjustment when considering residual value percentages.

When I was an economic major in college, the inflation rate was in the low to mid teens. Nixon put price controls on trying to break the cycle of inflation and there were many other ideas to fix the inflation rate. Inflation was the enemy. However, the inflation enemy wasn’t the same for everyone. I remember an economics professor stating “be careful of assumptions that inflation is bad for everyone.” In fact, a little inflation can be good for some people.  People with a fixed rate mortgage are one example where inflation is good. On the other hand, it is bad for people on non-inflation adjusted fixed incomes.

Perhaps a good economy will result in a more ”normal” inflation rate and thus a trend towards inflation adjusted historic normal residual values. Perception is a critical component of buying and selling behavior. I think psychologically, most owners would like to see a 10% increase in their projected residual value.

Mike McCracken


Hawkeye Aircraft Acquisitions