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1 Feb2011 Corporate Jet Finance LONDON CONFERENCE
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Feb2011 Corporate Jet Finance
LONDON CONFERENCE
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Kirsten Bartok, VP AIRCRAFT FINANCING &
STRUCTURED FINANCE
The Ups and Downs of Business Jets as Assets
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CONFERENCE TOPICS
The Ups & Downs of Business Jets as Assets
• How do you value a corporate jet?
• Prices have not fallen that far because they were not so
high to begin with
• Customization, remarketing and repossession
• Are corporate jet values more volatile than commercial
jet values?
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BUSINESS AIRCRAFT VALUES VOLATILITY – ANALYSIS OF THE DATA SOURCES
Few people in the business jet industry
truly know what aircraft trade for…
Wall Street research analysts value corporate jets using “Average Asking
Price listed on Amstat/Jetnet”. Unfortunately this data reflects prices of
where used aircraft are being listed, not what they are sold at
Yes this is a good proxy – but it is ONLY a proxy
There is no public data base of what aircraft ACTUALLY trade for
The only people who know the actual values are those involved in the trade
(buyer, seller, broker, lawyer and financier)
Brokers and aircraft financiers probably have the best view of where aircraft
are trading
But for example if you are a broker that primarily sells Gulfstream, you
only have a limited view of the market
The same can be said for aircraft financiers that only finance aircraft in the
US, they likely do not fully comprehend the dynamics of for example the
Asian markets and where things are trading there
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BUSINESS AIRCRAFT VALUES Percent Change in Average Asking Price
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BUSINESS AIRCRAFT VALUES VOLATILITY – DATA SOURCE – FOR SALE LISTED PRICES
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INDUSTRY BACKLOG BY COMPANY 1999- Q310
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INDUSTRY DELIVERIES BY COMPANY 1999- 2012E
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INDUSTRY DELIVERIES BY COMPANY 1999- 2014E
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BUSINESS AIRCRAFT MARKET SIZE Teal Group and JPMorgan
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VOLATILITY
Worse For Older Aircraft
• Price analytics based upon LISTED prices – not actual
prices. This has an inherent bias, and while directionally
correct it is highly likely to be proportionally off
• Older aircraft have suffered more (50% down)
• New aircraft (less than 10 years old) are only down 30%
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CORPORATE JETS VS. COMMERCIAL JETS MARKET LIDQUIDITY
• Commercial aircraft
values are a function
of their lease value
• Which means the
value is based on the
monthly payments an
airline will pay to
lease an aircraft for,
or in some cases the
salvage value
• Not so in corporate
jets
• Corporate jets are a
much more fluid and
tradable market
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CORPORATE JET SECONDARY MARKET How Business Jet Prices are Determined versus Commercial Aircraft
Similar to automobiles, the value is the “market clearing price” of
what people will pay for the asset at that time
• There are inefficiencies, not every buyer is the same or equally as
knowledgeable
• Which means there are deals to be had (depending on which side you are
coming from)- especially if people have imperfect information or are not that
knowledgeable about the industry
• In theory, this argues for investors to allocate their money to the business jet
market as opposed to the commercial space as business jet buyers are
generally less informed not being professional investors.
• For example, there are very few uninformed buyers of commercial aircraft…
• Typically a buyer in Asia or the Middle East will pay more than a US buyer
• This is partly due to commissions to brokers, as well as the fact that US
buyers are traditionally “bottom feeders” and are less concerned about
buying used equipment
• Drivers vary by market as well, Russia/China do not allow the import of
aircraft older than 10 years old
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CORPORATE JET IMPACT OF TAX POLICY
In the Corporate Jet market a lease factor is a function of interest
rates and the residual value estimate (and in the US the speed at
which the IRS will allow someone to deprecate the value of an
aircraft)
Tax policy also significantly impacts pricing and timing of next
purchase
In the US MACRS tax deduction (5-7 years) has driven the selling of a used aircraft
and buying a new one
Outside the US business jet owners seem to hold their aircraft for a bit longer
In the US operating leases are much less expensive due to the
deprecation deduction versus other domiciles
The ability to aggressively depreciate the value of an aircraft and
deduct it against your taxes earlier doesn’t exist in most other
jurisdictions
This also means that lease rate factors for aircraft flown 51% of the time in the US
are significantly less expensive than outside the US
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CORPORATE JET VALUE An Illustration
Illustration: Super Mid-Size Corporate Jet
– 2006 OEM List Price: $18 million • Typically the purchaser had booked his/her order 24 months in advance
• In the case of the Large Cabin OEM’s large deposits are required at CofA,
smaller business jet OEM 20%
• Speculation – because the backlog for these aircraft was strong (i.e. if you
wanted one now you would typically have to wait 24-36) the spot market
at delivery started to have the attributes of a bubble
• This Super Mid aircraft could be sold after delivery (or in some cases prior
to delivery if the PA could be transferred) for as high as $26M
• Once the Fall 2008 crash occurred aircraft values plummeted, but they
plummeted relative to bubble times, not relative to OEM pricing.
• Example again, Super Mid post crisis was likely trading at $15-14M
(based upon actual trades)
Prices have not fallen that far because they were not so high to start with
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CORPORATE JET VALUE An Illustration Prices have not fallen that far because they were not so high to start with
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CORPORATE JET VALUE An Illustration Prices have not fallen that far because they were not so high to start with
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SECONDARY MARKET VALUE VERSUS
ORIGINAL PURCHASE PRICE
138.9%
130.6%
86.1% 80.6%
77.2%
1 2 3 4 5
Secondary Value vs. Org Purchase Price At the bottom, this aircraft
had only deprecated 4.5%
per year in a worst market
seen in a century.
There was volatility, but only
if the buyer bought his/her
aircraft significantly ABOVE
published retail prices
If the buyer bought an
aircraft in the speculative
secondary market during
bubble times, the price did
fall 40+%
Alternatively, rational buyers
only saw a reasonable
degradation in RV (market
expectations typically 4-
6%/yr)
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CUSTOMIZATION FACT VERSUS FICTION
• Misconception #1: There is little
customization that goes into a bus jet
• Typically the only choices a customers
has are the following 3 things: 1. Wood color,
2. Fabric on walls,
3. Leather color on chairs
• In some of the larger categories (above
a super mid) there can be some
minimal configuration changes – Usually limited to 2-8 standard layout designs.
• It is only at the very high end do you get
large variations in design (BBJs &
ABJs)
• Even with the Globals, G550 and G650
and 7Xs the variations are not great
• Former head of Gulfstream’s
completions says in his entire 25 year
career he has only seen 15-20 showers
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CUSTOMIZATION
MEANING FOR INVESTORS
• If you get an aircraft returned what do
you need to change to resell it? – The degree depends on age and usage
• Exterior paint ($100-$150) – often times
the aircraft just needs a good buffing and
new strips (costs $30K)
• Carpets ($45K) – this needs to be
refreshed regularly regardless
• Interior fabric on walls ($100k for all
walls, $30-40K for side walls)
• Leather on the chairs (especially if they
have been well used) – $15K a seat,
8x15=$120K
• In repossession, the refurbishment costs
of anything below a BBJ & ABJ are
inconsequential. Typically between
$200-$300 on average for an super mid
size aircraft ($20-25M new - $12-15M
used)
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INSPECTIONS
Costs of Interval Checks
• Calendar and Hours
• 12, 24 and 48 months
– For example at 48 month, all 3 checks would have
to be completed
• 800, 1600 and 3200 hours
• $20,000 - $200,000
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DEGREDATION IN VALUE DEPRECIATION / RESIDUAL VALUE DISCUSSION
• Business aircraft
retain their value
better
• Depreciation is a
cost – just as
maintenance,
capital costs and
fuel
• If your aircraft
deprecIates less it
costs you less
• Larger aircraft hold
their value better
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
% O
F O
RIG
INA
L V
AL
UE
COMMERCIAL AND BUSINESS JET MARKET VALUE COMPARISON - FIFTEEN YEAR OLD AIRCRAFT
Source - Ascend Online (V1) Values
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DEGREDATION IN VALUE DEPRECATION / RESIDUAL VALUE DISCUSSION
0%
25%
50%
75%
100%
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10
20
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20
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Ind
ex
(%
)
FORECAST BASE AND SOFT VALUE COMPARISON (0% inflation)Source - Ascend Online (V1) Values
2010 Challenger 300 Base
2010 Challenger 300 Soft
2010 Embraer 170 Base
2010 Embraer 170 Soft
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DEGREDATION IN VALUE DEPRECIATION / RESIDUAL VALUE DISCUSSION
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DEGREDATION IN VALUE DEPRECIATION / RESIDUAL VALUE DISCUSSION
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DEGREDATION IN VALUE DEPRECATION / RESIDUAL VALUE DISCUSSION
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COMMERICAL AIRCRAFT
DEPRECATION IN VALUE
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0 1 2 3 4 5 6 7 8 9 10 11 12
Re
sale
Val
ue
as
Pe
rce
nt o
f O
rigi
nal
Pu
rcah
se P
rice
Historical Re-Sale Value Trends of the Hawker 800XP Model vs. Commercial Jet Trends
-4.2%/yr
-5.3 %/yr
-6.5%/yr
Average Decline:
Hawker 800XP re-sale trends pre-2008
Boeing 777-200ER
Airbus A340-300
Hawker 800XP re-saletrends 2008 and later
-7.1%/yr
Note: HBC and Boeing Capital Corporation, Presented at the JP Morgan Airline, Aerospace and Airfreight Conference, February 23, 2006
Mid-size business a/c re-
sale trends pre-2008
Mid-size business a/c re-
sale trends 2008 and later
Historical Re-Sale Value Trends of Mid-Size Business Aircraft
vs. Commercial Jet Trends
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AVERAGE UTILIZATION COMMERICAL, REGIONAL AND BUSINESS JETS
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JET VOLATILITY AN EXPLANATION BUSINESS JETS MAY BE MORE VOLATILE, BUT
Due to the unique propensity of business jet buyers to sell their aircraft immediately
after delivery to lock in a profit, the business
jet market is more prone to speculation
Commercial aircraft – the only speculation that occurs is on the
part of highly knowledgeable
lessors – not the average HNWI who
may be looking to lock in some extra profit
(good example Eclipse early buyers)
Above a super mid size aircraft typically 80% of the aircraft
price is due at CofA – cutting down on
speculators
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REASONS WHY BUSINESS JETS MAKE
GOOD INVESTMENT
Greater Market Liquidity
• Large number of diverse buyers in economically and geographically diverse locations
• Moving away from dependence on the US consumer to drive deliveries
Less Vulnerable to Sudden Flooding of a Particular Type
• Diverse & large customer base, most of whom operate only 1 aircraft. Means the market is generally less vulnerable vs commercial airliner market to sudden flooding by an operator
Corporate customers comprise the Largest Sector (75%)
• HNWI being 25% - Both tend to have better creditworthiness & exhibit greater resilience to economic fluctuations
• Caveat: highly leveraged real estate investors – who are active in the market because unlike other HNWI they can personally take the deduction
Operating Cost Improvement or Increased Fuel Costs have less Impact on Owners
True Diverse Liquid Market versus Lumpy Duopoly
• Results in greater pace of technology innovation
5-7 Year Turnover
• Either due to habits or tax benefits, bus jet customers regularly turn over their fleets (especially for new upgraded products) which leads to a large & healthy secondary mkt
Longer Life
• The average age of business jets is 15 years vs 13 years for commercial aircraft
• Partly due to the fact that upgrades/modifications enhance value older aircraft prolong their useful life
• Partly due to Lower Annual Utilization
