How old of a business jet aircraft is too
old?
Older business jet aircraft are an interesting value
proposition. It is important to
understand a few terms to better understand values today, where they might go,
and some background on the drivers.
Physical Life—The number of years that a new property will
physically endure before it deteriorates or fatigues to the point of being unsuitable
for its intended use. i.e. Corrosion
Economic Obsolescence—Or external obsolescence, the loss in
value or usefulness of the property caused by factors external to the
property. i.e. New regulations
Functional Obsolescence—Depreciation in which the loss of
value is due to factors inherent in the property itself, technology, operating
costs, changes in design and lack of utility.
i.e. Examples are engine efficiency, avionics capability, lack of parts, downtime and operating costs.
The old straight pipe jets obsolescence was easy to
recognize as the engines were loud and not fuel efficient. Fan powered jets marked a new generation with
greater range, lower sound levels and more thrust. A layman could see the difference.
We have entered into a phase of the market this time that is
slightly different and more difficult to discern than in the previous
example. Engine technology has improved,
however the delta is smaller. Other
factors are still in play with older airframes becoming increasingly more
expensive to maintain, certain parts becoming more difficult to procure, increased
maintenance downtime, corrosion issues, and avionics packages that are not only
more expensive to maintain, in certain parts of the world the airspace is
becoming more restrictive and the upgrades to fly in the airspace are
expensive.
The results while not as easy to see, are just as real as
before. Simply put, these older planes
still have physical life, however they have or in the short term will become
either functionally obsolescent or economically obsolescent.
The old adage you can buy a lot of maintenance for the cost
of an upgraded plane needs to be carefully evaluated. A plane is a capital investment and similar to
other capital investments there is a point of diminishing returns where you
really are putting good money after bad.
What is that point? Performing a
life cycle cost analysis complete with cost of capital is one of the better
methods to understand if you are wasting money on the current aircraft.
This is the reason that when the aviation market is fully
recovered we will not see a large uptick in the 20+ year old aircraft. It will be cost prohibitive to spend the
money to keep these planes flying when other viable options at much lower
operating costs and a life cycle costs including cost of capital are available.
Whether you calculate these costs or not, the marketplace
will, and often exaggerates the costs further decreasing values. For planning purposes the goal should be to
change to newer technology aircraft prior to the current aircraft’s functional
or economic obsolescence and retain more value than waiting until salvage
value.
Hawkeye Aircraft Acquisitions LLC can help with the analysis
and acquisition.
Mike McCracken
President
Hawkeye Aircraft Acquisitions LLC
Office 727 796 0903
