For nearly two years we have been in the most significant seller’s pre-owned aircraft market in recent memory and the consequences are beginning to surface in various ways.
First, during this unprecedented seller’s market, some buyers, in order to be selected as the winning bidder for a particular aircraft, have skipped full pre-purchase inspections and complete aircraft records reviews the consequences of which are now surfacing.
One consequence we are seeing is that some aircraft which were thought to be charter ready, are not able to be added to Part 135 certificates unless major modifications are done. Not only are these modifications expensive, but supply chain issues and limited openings at maintenance facilities are causing extensive delays. Additionally, when the new aircraft owners take their aircraft into the shop for the first scheduled inspections since closing, the findings are overwhelming. Major corrosion on the aircraft and undisclosed deferred maintenance are just a few of the issues that have come up.
An additional consequence of this seller’s market is that buyers expediated the purchase process, prior to developing an accurate operating budget for the aircraft. As such, buyers did not plan or budget for upcoming major inspections and/or unknown discrepancies. As a result, the cost to own and operate the aircraft exceeds the estimated costs put together during the quick purchase process.
Next, there has been an increase in management company changes during the initial year of aircraft ownership. New buyers who purchased aircraft quickly selected management companies before fully vetting the company to make sure it was a good fit. As a result, aircraft owners are changing management companies at levels I have not seen before. The increase in management company changes is costly to the industry due to the time and money that are necessary to onboard the new aircraft and owner and then to quicky have to offboard them. These costs include legal documenting costs, internal hours, and most important personnel issues. If pilots, flight attendants and/or maintenance technicians were hired by the management company during the on-boarding process, then the crew will need to determine (with the help of the aircraft owner and management company) if they should stay with the current management company or move to the new management company.
Finally, in some instances the charter revenue expected is not being realized. The reasons for such charter revenue shortfalls range from overestimated revenue, increased maintenance costs, or aircraft availability issues due to more owner flights than predicted. Additionally, there have been long delays in getting the approvals necessary to add aircraft onto Part 135 certificates, thus delaying the generation of charter revenue with the aircraft.
On a brighter note, since we continue to be in Seller’s market, buyers who purchased their aircraft at the start of the pandemic can now become sellers and realize tremendous gain. I have seen several previous buyers become sellers and earn enough profit on the sale to cover the operating costs of the aircraft for the two years the aircraft was owned. However, once the aircraft is sold, the aircraft owner will have difficulty finding a replacement aircraft. In addition, there continues to be long lines to join membership programs or fractional programs. Another trap to be aware of for the buyer turned seller- the sale of the aircraft may also cause tax issues, if the aircraft was used for business and depreciated more than the sales price.
Going forward, what can be done if we continue to stay in an imbalanced sellers’ market? If a full pre-purchase inspection is not possible, hire technical experts to spend a day or two with the aircraft and records for a detailed visual inspection and records review prior to the closing. With the right technical team some, but not all, issues can be discovered without a full pre-purchase inspection. This should help with the development of an accurate operating budget. Additionally, before an aircraft is even found, management companies can be interviewed. This way the right management company will be ready to engage when the aircraft is purchased.
In an ideal world full pre-purchase inspections would become the norm again and deals would progress a bit slower as a result of the longer inspection timeline. However, until that happens, hiring the best available technical representatives for a limited scope of inspection is the next best thing, along with working in advance to select a management company to manage the aircraft.