Rants and Podcast
Unique Insights from Business and Industry Leaders. We provide unique content that covers the most relevant industry topics.
Oct 5, 2018 | Rants
Can Older Jets Threaten BizAv?
In the late 1990’s / early 2000’s Northwest Airlines created an entire strategy based on old, heavily used, pre-owned jets which has successfully carried over to Delta (post-merger). Could business aviation go the same direction?
Do Jets Wear Out?
If you’re asking Delta Airlines, the answer is very simple – “At some point.” Delta’s fleet age is more than 17 years on average and its oldest aircraft is about 25 years old.
Yes, older jets require more maintenance and typically use more fuel, but when you compare the reduced capital cost compared to that of new, then the financial dynamics can make a lot of sense.
“We’re seeing a huge bubble in excess wide-body airplanes around the world,” former Delta CEO Richard Anderson said during one of his last earnings calls before his retirement.
The result of that bubble? According to Anderson, they were seeing mid-life Boeing 777-200 aircraft being made available in the market at about $10 million. Compared to a new jet from Boeing, with a list price of $200M+ and the delta (pardon the pun) is staggering!
Northwest Airlines in the Early 00’s
Delta’s business case started in the early 00’s at Northwest Airlines whose executives discovered a few things:
Old Aircraft are Reliable and Cost Effective: Old DC-9’s flew passengers reliably for a long time and the minimal capital investment made the aircraft very profitable. All they required were ~$6M in structural / interior mods and updated avionics and they became long-term revenue producing machines. Interestingly, they were also the most reliable flyers in the Northwest fleet.
Surplus of Used Aircraft Are Leverage Against OEMs: Northwest also decided to purchase old DC-10-30’s and refurbish their interiors also. They were then used as leverage against Airbus for better deals on Airbus A330’s. The strategy worked as Airbus came to the table with “value” pricing and before they merged with Delta, Northwest was one of the biggest operators of A330’s in the world.
Costs Can Be Controlled: Low engine lease rates on JT8 and JT9 engines and the use of Used Surplus Material (USM) from tear-down aircraft were effective in keeping costs down.
Interior Upgrades Make the Difference: Keep the interiors upgraded and the passengers will never know the true age of the airplane. Just hide the data plates.
One Man’s Crisis is Another’s Opportunity. After 9/11 the values of JT8D engines were near zero. Northwest used depressed market conditions to secure RIDICULOUSLY low engine lease rates which made operating costs for the DC-9’s very low AND predictable.
Business Jet Values Have Plummeted to Never Seen Bottoms
In 2001 I stood on in the lobby of a San Jose FBO and listened to finance executive proclaim “we love financing business jets, they NEVER depreciate.” At the time, she was right. A five or six-year-old airplane would often command a premium over its original purchase price.
Oh… the sure signs of a bubble in its infancy stage. Welcome to 2017.
Whatever the reasons, the market is now seeing gently used business jets, many with under 1,000 hours, available on the resale market for 50% (or less) from which they sold for new, causing agony for owners and OEMs. And, that agony is justified. As reported by AIN News, June 27, 2017:
The average asking price across six pre-owned business jet types decreased by approximately 35 percent, falling from $13.7 million to $8.9 million, between April 2014 and April 2017, according to research from London-based business aircraft broker Colibri Aircraft. Models in the study included the Cessna Citation Mustang, CJ2 and Excel; Bombardier Learjet 45 and Global XRS; and Gulfstream G550.
In just the last year of the study period, the average asking price fell by $1.97 million for these aircraft models, which represent the light, midsize and large-cabin business jet segments. They are also taking longer to sell, with the average number of days on the market before sale increasing from 345 days in April 2014 to 391 days this past April.
Comparing the Current Business Aviation Environment to Northwest and Delta Airlines
There are several, scary similarities to Northwest / Delta that business aviation is facing:
Enhanced Value in Pre-Owned: The OEMs are now competing against their own products – and often losing! They have certainly lost pricing power. As one OEM sales rep stated plainly. “New airplanes are being sold at wholesale prices.”
Costs Can be Controlled: High quality maintenance support from respective airframe and engine OEMS and third parties such as JSSI allow today’s generation of business jets to age more gracefully than those of previous generations. More importantly, they can continue to be flown with very predictable costs since most of the maintenance is “on condition” or Power by Hour.
Abundance of Interior / Maintenance Shops: An abundance of interior completions / maintenance facilities keeps interior refurb and costs and maintenance labor rates competitive. Add fresh paint, GoGo, ADS-B, new glass and, Voila, one has a “new” jet.
One Man’s Crisis…: The politics of the great recession crushed business jet values which have only sporadically recovered. The low selling prices have been a boon to Part 135 operators and value focused buyers.
Remanufacturing: Add “remanufacturing” to the list. The aftermarket’s ability to “remanufacture” piston aircraft drastically hurt the GA industry. I think it can do the same to business jets. It certainly supports the case that jets don’t really wear out.
After 9/11 the airline industry was in a crisis which created an entirely new definition of “value.” Fast forward to 2017 where the business jet industry is overbuilt and under threat of being redefined as well. What are the options?
OEM Pause: The OEMs can always reduce production, and probably will.
Reduced Product / Customer Support: Is the third or fourth owner of an older Learjet, Citation or Gulfstream really an OEM customer? To that regard, can the OEMs make support of older aircraft so expensive that it drives them out of the market? According to the CEO of one company, “YES, that can be done.” Does it make sense? Maybe.
Revolutionary New Products: The Gulfstream V, Global Express, Citation X and Challenger 300 and fractional ownership were “game changers” that excited the market. The new Gulfstream 500 / 600, Falcon 8X and Cessna Latitude are great airplanes, but are they true “game changers” or a nicer version of the same? What’s the next product that overstimulates demand? SSBJ? Tiltrotor? Something else?
Wait It Out: Sometimes the best recipe is patience for, in many cases, overabundance can turn into shortage, which creates a new cycle in itself. In the meantime, the OEMs can do what they do best – design great jets – and accept what the market is willing to give.
It’s Never Easy
It took a lot of creative thinking for airlines to survive the aftermath of 9/11 and nobody got more creative than the leaders of Northwest. In similar fashion, the politics and events of the great recession continue to hurt business aviation. For them to thrive, business jet manufacturers need to get creative and find ways to stabilize the values of their gently used products, lest they start to compete against them.