Second wind for business jets

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Demand for business jets is pushing up the price of used aircraft - providing plenty of work for brokers and refurbishment companies

Business aircraft purchasers unwilling to wait in line during record manufacturer backlogs are turning to the used market and increasing demand on the completion and upgrade sectors.

The demand is driving prices up and turnover times down. In the second quarter of 2006 it took an average of 10 months for jets to find a new owner, compared to eight months in the second quarter of 2007. Back in the second quarter of 2002 the average sale time was 16 months, and 339 used jets and 319 turboprops were sold, compared to 581 and 412 respectively in the same period this year.

"Prices have risen dramatically because people, particularly in the long-range market, want to have aircraft now," says Washington DC-based broker Rick Engles. "Who knows, they may not be CEO in 2010, so they want their aircraft today and they're willing to pay a premium for it."

The biggest problem, he says, "is finding the product before it becomes available in the marketplace so you can stop bidding wars before they start". The Blue Book value can be a month or two behind, and "by the time they figure out they have to pay more, it's gone".

Four years ago the average sale price was 10% below the asking price. Today the asking price does not drop, says Steve Gade, vice president of sales and marketing for Duncan Aviation. "The aircraft are still available, it's just a matter of responding quickly and being able to pay the price." Bigger aircraft see the highest demand, he says, just as the manufacturers' backlogs stretch the farthest for their largest aircraft.

The biggest demand is for aircraft less than 10 years old, says Susan Sheets, president of the National Aircraft Resale Association. "Older aircraft do sell, just not as quickly," she says. "Damage is what you look for, and hours on the engine." Many aircraft are sold 'as is' without upgrades, she says, but "there are upgrades that are mandatory for safety enhancement and compliance". Sheets adds: "New engines are common for models like [Dassault] Falcon 20s and Hawkers for more efficiency, but for most pre-owned jet aircraft exchanges on engines are uncommon unless you are completely overhauling the aircraft."

Approximately 12-13% of the total business jet fleet is currently for sale, she says, with owners cashing back in on the investments they have been flying. "You buy a pre-owned jet, you sell it two or three years later and it's retained 80% of its value."

Sales cross international borders, with demand jumping from India to China and Europe, despite frustrations in meeting new European Aviation Safety Agency requirements.

The internet helps buyers select an aircraft, but not to find it. "Buyers are becoming more savvy, and that's good. We want more educated buyers, but we're not losing sales to the web," Sheets says. "Eighty percent of all aircraft business transactions are handled by an aircraft broker/dealer and that's because it is a very complicated high-end transaction and it's worth paying for that expertise." NARA members conduct about 20% of worldwide business jet transactions, representing about $2 billion in annual sales.

But Sheets sounds a note of caution: "With more business and more aircraft, there is more opportunity for shady dealers to get in." That problem led to NARA's founding 17 years ago. With no need for a brokers/dealers to be registered, there have been occasions of false representation. "Typically, it's one or two deals that they do and then they're out of the market because people find out about it," says Sheets.

Engles has 30 years' experience as a broker and he is not turning the rising trends into more sales. "It's difficult for us to work twice as fast and not skimp on personal attention that we need to give our clients," he says. That attention includes inspections and technical appraisals and assisting with financing when needed. The higher sale prices do mean higher commissions for his firm.

"It has been cyclical and we have seen this before, maybe 10 years ago," he says, "but at that time the OEMs increased production dramatically. The market then cooled a bit and they were left with a lot of whitetails and unsold inventory, and this time the OEMs are being much more conservative and not increasing production dramatically."

Costlier than new

That occasionally leaves the barely used jets costing more than the newest models, says Gade. As its sells and upgrades used aircraft, Duncan Aviation has steadily expanded along with demand over 10 years. Ity sells accessories and instruments as well as aircraft, and is busy swapping out old technology for new.

"If you call us up tomorrow we can have you in the shop in three or four months," Gade says. "We won't start the project until we've got the parts and engineering and everything completely laid out. A customer can't afford to have an aircraft sitting idle. We do a lot of pre-arrival work, as far as wiring harnesses and engineering. The typical length of a project is between six and 16 weeks."

Customers order improvements for safety and performance, but also for preference. "You just spent millions on a new aircraft. Even if the interior has been used well and doesn't have any problems, you'd want to change it to make it your own. Just to freshen it up." That extends to relaxation. "New chairs, tables, entertainment systems. The VHS may still work, but they'd rather have a flat screen with a DVD." Workspace hardware like computers and presentation equipment are popular, and cockpit upgrades are practically a necessity.

Andy Biller, of Duncan's Glass Box project, says: "We buy equipment from major suppliers like Collins, Honeywell and Universal and we install them into Hawkers, Falcons and Astras on a regular basis," he says. "Those who choose the retrofits often do so as an alternative to buying a new or different aircraft. It adds value from a financial perspective." Improved situational awareness for the pilots makes for a smoother ride, and the glass cockpits are easily upgraded to meet the future airspace requirements. "Those who are purchasing these retrofits want the large graphic displays and the computer servers that come along with them so they can display new content. When we take out the old and put in the new, there has to be, at minimum, a duplication of what was in there before."

Upgrades and retrofits have piggybacked onto new fleet sales and led to unprecedented sales for Universal Avionics, says Paul DeHerrera, vice president of marketing and support. "It creates stability, obviously, because you've got this flow of equipment going out the door for the OEMs and you can kind of predict the future because you've got these orders."

Advance orders

DeHerrera says manufacturers can be challenged by shortages of sub-tier products and parts. "Fortunately the OEMs tend to order parts well in advance so they give us a lot of lead time. It's a nice problem to have." One problem they do not have is a lack of workers. "What's interesting about electronics, flat-panel displays and avionics is they are highly automated. For the amount of product we put out, there's not that many people involved."

Universal still runs only one shift a day even as orders climb to mass quantities. "Instead of running a line of 20 pieces we can run a line of 150. What takes a lot of time is the assembly of the pieces, but we can cover that with overtime." Installing the finished avionics takes two to three weeks, he says.

When an all-new interior is required, the new owner runs into a different backlog, says Yankee Pacific Aerospace managing director Ken Goldsmith: "The aftermarket for VIP customers has imposed demands on capacity beyond anything we've seen to date. Those very large aircraft, which consume an enormous amount of capacity alongside the more standard large business jets that need completions work. When those aircraft change hands, there's often a demand for some kind of improvement to the aircraft, even if it's nothing more than paint. But usually you get into refurbished interiors, or new avionics packages."

The New Hampshire company was formed a year ago to provide engineering services to support completion centres, and it is now outsourcing to India for their own engineering support. Yankee Pacific fabricates large interior products like cabin liner systems, the underfloor structure and overhead bins.

On the propulsion side, modern digitally controlled engines are an expensive, but increasingly justifiable upgrade for older, thirstier aircraft. Long wait times for new fuel-efficient aircraft are stimulating demand for re-engining. "Our business certainly benefits by backlogs at the major OEMs, but not solely," says Jim Clifford, chief executive of Clifford Development, which is re-engining the popular Cessna Citation II. "The driver in our business, in this marketplace, is the availability of the technology. Up until the Williams FJ44-3 engine there really wasn't a solution in increasing the performance and lowering the fuel burn in a Citation-class aircraft," he says.

Clifford Development has supplemental type certification for the new engines on the Citation II and in September announced an STC on the S/II. At the 2007 NBAA convention in Atlanta the company will have a Citation Bravo in the static display "so everyone can see what it looks like with Williams engines on it", says Clifford. "That certification will probably occur in the first quarter of 20008. And we're not prepared to announce publicly what our third aircraft is."

The company has orders through the first quarter of 2008. "The guy who is just buying his aircraft generally finds that the business jets that are available on the [used] market need [new] engines," Clifford says. The owner has to decide "do I spend a bunch of money overhauling the aircraft and ending up with no more performance or fuel efficiency than I did before, or do I spend a little bit more money and get a little more performance?" Changing a pair of older 2,500lb-thrust (11kN) engines for new 3,000lb-thrust powerplants costs $2-$2.5 million. "As you move up to the 4,000lb-thrust range it's in the $3-3.5 million range," he says.

Technology upgrade

The company sets up the work, but does not have any facilities to perform the re-engining. "Clifford is a company that develops the intellectual STC process, and we license service facilities around the country to install the product," Clifford says. While the new engines are being installed, almost 30 other items are upgraded with "newer technologies that limit the operator's obligations for future maintenance", he says. "For example, on a Citation, the starter/generator brush life is fairly limited because they get really hot. We actually modify the starter/generator to accept-fan bypass air so it's cold all the time during a start on the ground, and that will dramatically change the life of the starter."

Other older types such as the Learjet 35 are also getting a new lease of life as engine retrofit programmes boost their value and longevity, says Engles. "But some aircraft which have become too costly to operate and upgrade are losing their appeal, such as the Gulfsteam II and Lockheed Jetstar. The Falcon 200 is having a particularly hard time. These aircraft - of which 33 were built for the civilian market - are now selling for as little as $3 million because the cost of maintaining the aircraft's Honeywell ATF3 engines has become too prohibitive for many owners, " he says.

In the face of such escalting costs, increasing numbers of older business jet types are being parked, retired or destroyed. According to Flight's ACAS database, between 2000 and 2006 the retired fleet climbed by 339 aircraft to 1,042 while 115 aircraft were destroyed and 228 parked during the same period. Not surprisingly the majority of the affected aircraft are based in North America, home to the largest business jet fleet, followed at a great distance by Europe and Latin America.

Large cabin business jets like the Bombardier Challenger series are in strong demand on the used aircraft market