Written by Duncan Aviation
Selling an aircraft in a market impacted by COVID-19
As travellers are becoming skittish about being crammed into airplanes filled with hundreds of people from all over the world, more and more of us are turning to private aviation. A large portion of the demand for private travel is driven by travellers who want to mitigate exposure to a deadly virus.
According to Forbes, an observatory study done by European private jet charter operator GlobeAir found that transiting passenger terminals at airports and flying on a commercial airliner create around 270 possible person-to-person interactions where one could be exposed to Coronavirus versus fewer than 20 on private flights.
Individuals in a position to do so are finding ways to reduce the risk and stress caused by the pandemic.
GlobeAir has reported a 67% increase in new clients who were historically frequent business or first-class travellers. A majority of these newly acquired first-time private flyers have declared they chose business aviation to lower the risk of infections.
Those individuals who are able to fly privately are being driven by health, hygiene, and convenience factors. Why risk being crowded into an airplane cabin with hundreds of individuals, of which you have no idea where they've been, when you can board your private aircraft and go wherever you please, whenever you please?
Paul Jebely, managing partner and co-chair of private wealth at US-based law firm Pillsbury Winthrop Shaw Pitman is widely regarded as a leading global private aviation lawyer, focusing on advising ultra-high net worth individuals and their businesses. Paul has advised clients that together hold more than $250 billion in published wealth and handled over $15 billion in aircraft transactions as well as on contentious matters over his years.
"We are in a so-called 'buyers' market', not a bargain shoppers' one," Paul says. "But, I am sure there has been and will be a bargain or two to be found."
Paul has been advising his clients, including a few newcomers, that aircraft values were softening pre-crisis and have certainly softened further. However, they have not fallen off of any cliff.
"I believe that a lot of the factors supporting historically stable aircraft values will be absent going forward, though at the same time the original equipment manufacturers (OEM) have thankfully (though involuntarily) reduced production rates for this year," Paul says. "Separately, I do have clients with upcoming new large cabin deliveries and I expect to be delicately negotiating concessions with OEM's in the near future."
Paul has started, and closed, sales, purchase and re-financing deals in the US and Asia since April with more to close over the next few weeks in both regions plus the Middle East, all of which are secondary market transactions, and one with a newcomer buyer.
How has COVID-19 affected aircraft transactions?
Since the world started to change in March 2020, and business jet utilisation decreased across the board, the Duncan Aviation Aircraft Sales & Acquisitions team has already closed 13 aircraft transactions.
Duncan Aviation Aircraft Sales & Acquisitions expert, Tim Barber, recently closed on a European-based Global Express XRS that was to be relocated from Farnborough, United Kingdom, to Duncan Aviation's newest full-service maintenance, repair, and overhaul (MRO) facility in Provo, Utah.
Tim anticipated an environment where travel was going to be increasingly difficult due to worldwide restrictions and travel bans, and knew he would improve his chances of selling the aircraft if he had it relocated. In addition to the travel restrictions put in place by the United States and the United Kingdom, Duncan Aviation banned all but essential travel for its team members in order to comply with World Health Organisation guidelines to flatten the curve in the early days of the pandemic, benefiting client and prospect safety.
"At that stage, around 90% of enquiries were from the United States, so it was a matter of maximising the opportunity based on aircraft location," Tim says.
The aircraft sold just 69 days after being brought to market.
According to AMSTAT, a business aircraft market research platform, the standard Global Express XRS listing has been on the market for 254 days. This aircraft was the fourth Global Express XRS to sell this year, with the others taking an average of over 200 days to sell.
"A very cooperative client, an equally pragmatic buyer, and a great team at Duncan Aviation were the reasons this aircraft sold in such a short time," Tim says. "This really demonstrates what Duncan Aviation is capable of doing, even during a global pandemic."
Managing Director and Head of UBS Corporate Aircraft Finance Johan Blitz had a similar experience as Tim.
"The logistics of closing deals on pre-owned aircraft have created new challenges," Johan says. "Aircraft viewings are challenging, pilots are having to quarantine, reduced administrative support at the registries, and reduced staffing at some MROs all pose certain challenges."
In light of low or even negative interest rates, clients keep looking for ways to invest and in turn banks are keen to advise on the topic and are motivated to lend. Johan says some clients are looking to refinance their aircraft in order to raise liquidity, and a number of buyers of new aircraft have postponed their deliveries as best they could.
"When COVID-19 hit, the initial thought was that it wouldn't be much different from SARS/MERS," Johan says. "However, that escalated fast and our clients were somewhat paralysed by these developments. We were impacted quickly, however business started to come back around early May, and in the last six months we have seen deal numbers similar to prior years. Deal sizes have been smaller because of financing more pre-owned aircraft and consequences of refinancing deals with lower market values on three- to five-year-old aircraft. As we've always done at UBS, we will continue to look after and help our customers to the best of our ability."
Tim stresses the importance of choosing an aircraft broker who will have the client's best interests in mind.
"Duncan Aviation began as an aircraft sales company in 1956, and we are known for finding clients the right aircraft - not just an aircraft," Tim says. "We de-risk the purchase, reduce the surprises with forthcoming maintenance; we understand where technical issues may arise, and overall we make the client's life easier."
For first-time buyers, it is important to have a well-designed aircraft acquisition plan. An effective plan consists of the following elements:
Tim says, "Through our acquisition services, we help those looking to purchase or upgrade aircraft identify the right make and model to best meet their flying missions, obtain that aircraft at the best purchase price and ensure it is equipped to maintain the highest long-term market value."
Nic Arnold, who specialises in looking after PwC's more complex Private Office clients, reiterates the need to get good advice, especially when a client is new to the market. "I completely understand the increased interest in purchasing private jets given what we've been through over the last few months", says Arnold; "however there is more need than ever to ensure that clients take holistic tax and structuring advice which is tailored to their specific situations."
Nic has seen a number of examples of private clients and businesses activity looking at aircraft purchases during the pandemic, with even a conversation forged during NHS clapping leading to new client work to advise on the use of a corporate jet within a family business.
"The tax environment for private jets has changed significantly over the last few years and this needs to be taken into account when bringing an asset like this into your personal or business life. The income tax rules have changed for business use, and attitudes to VAT planning have tightened considerably". Nic also observes that the way private aircraft were commonly operated in the past may well be unadvisable today and pilots and potential owners often don't realise this.
Döhle Corporate and Trust Service Limited Business Development Director Allister Crossley said that pre-COVID-19 (end of 2019, early 2020) there was a lot of activity regarding structuring deals, as pricing had stabilised, depreciation of assets didn't look so bad, and aircraft were affordable in relative terms.
"When COVID-19 hit, things stalled for two weeks or so," Allister says. "High-level research projects just stopped for a while as people took stock of the situation."
After a month or so, Allister said the phone started to ring again with some prospective buyers seeking distressed assets.
"It was hard to explain that not all sellers were distressed/desperate," Paul says. "Buyers didn't necessarily want to hear that their strategy was wrong."
Tim agrees, "I had many people call me with $10m, wanting a $17m-$20m aircraft at that stage. The market changes are very different to the 'edge of a cliff' scenario we saw at the start of the Global Financial Crisis."
Allister explains that people started looking closely at the commercial vs. private aviation options, which has in turn generated more traffic and created a lot more interest in business aviation.
"There is a lot of feasibility work underway, but people generally are moving slowly and cautiously," Allister says. While this may not mean a rapid increase in transaction turnover, Nic at PwC, is encouraged that part of this caution should include taking up front tax advice on getting such a large purchase even for the more wealthy structured correctly.
Allister is hopeful that as restrictions are lifted, some of this activity will be crystalised.
Tim and Allister both agree that there has been a lot more activity in light and medium aircraft, as operators needs have changed.
"Whether it's for business or pleasure, business aviation has always been the safest option," Allister explains. "For far too long business aviation has been on the back foot due to not only the public perception, but also the excellent first-class price offerings from airlines. However, now safety has become a paramount concern and there is a real chance that charter will become the new norm for ultra-high net worth individuals. COVID-19 has created a different outlook and an excellent reason to travel privately."
Allister explains that this trend will drive the charter/business aviation market, which will result in increased buyers looking for quality aircraft at the right price.
"This benefits everyone in the industry," Allister says.
Find out why leading brands in the private client industry are partnering with PCD to raise their profile, make connections and drive new business.
Find out how you can participate in the leading club for international private client advisors and unlock opportunities around the globe.