Buy the Numbers

  • Kevin O’Leary

The private aviation industry shows signs of recovery, but conditions remain ideal for buying a pre-owned private jet. Demand for these secondary-market aircraft is still low; inventory is high; and so prices are still far below their usual levels. However, the best buys might be the aircraft with near normal prices.

When our clients want to purchase a jet, we first help them select the category of jet that best suits their requirements: light, midsize, ultralong-range, and so on. We then compare the performance capabilities and operating costs of all the jets within the chosen category to show which aircraft have desirable numbers. A jet that rates high in these two areas will most likely be in demand when the buyer chooses to sell the aircraft, and that demand, enhanced by an aircraft’s strong worldwide support network, will mitigate its depreciation.

We operate under the assumption that the buyer is more interested in recouping as much of the investment as possible upon the sale of the plane than with reaping the tax benefits associated with an aircraft’s depreciation.

In typical economic times, a 5-year-old pre-owned jet sells for about 70 percent of its initial purchase price. Instead, they are now selling for about 50 percent.

The super-midsize Bombardier Challenger 300 and the midsize Cessna Citation Sovereign have defied this trend. Each has maintained a significant advantage in residual value over the other jets in its category, and, not surprising, both aircraft boast superior performance and relatively low operating costs. Neither plane comes at a bargain price on the secondary market, but the high residual values indicate that these aircraft represent solid investments whether they are purchased pre-owned or new.

The typical super-midsize aircraft has a range of about 3,000 nautical miles (the equivalent of about 3,450 land miles), which allows it to fly nonstop between almost any pair of cities in the continental United States. These planes can travel from the East Coast to the West Coast—against the wind currents—and from the West Coast to Hawaii. They usually seat eight or nine passengers and have ample baggage room, even for golfers.

When developing the Challenger 300, an all-new design that was initially announced in 1999 at the Paris Airshow and called the Contintental, Bombardier—intent on maximizing the plane’s performance—employed 3-D modeling and supercomputing. It also considered the input it received from owners of Learjets and other Bombardier aircraft. The Challenger’s large passenger seating area (16.5 feet long), flat floor (under a 6.1-foot-high ceiling), and generous baggage capacity (106 cubic feet) are all desirable attributes. Its performance on the runway (at sea level in standard weather conditions, it needs only 4,810 feet to take off and can reach a cruising altitude of 37,000 feet in 14 minutes) and range (3,527 land miles) make it exceptionally versatile and mission capable.

An aircraft design is a series of trade-offs in which improvements to one aspect of the plane often adversely affect another. To use a simplified example, a larger cabin creates more drag and weight, which usually necessitates larger engines that burn more fuel; greater fuel burn means higher operating costs. But the advanced modeling process behind the Challenger’s design enabled Bombardier to maximize performance while maintaining competitive operating costs.

An aircraft design with minimal compromises usually becomes a very marketable jet. The marketability of the Challenger is evident in its residual value. Comparing the price of a new Challenger purchased five years ago with the current average secondary-market price of this plane demonstrates the value of selecting the right jet.

The "Challenger 300 vs. Class Average" graph illustrates how the Challenger has performed on the secondary market over the last five years and how the rest of the class has performed. Both lines of the graph begin at the prices of new aircraft in 2006 and chart the secondary-market prices of those aircraft over time.

In the last five years, the Challenger has retained just over 70 percent of its initial purchase price, which, as previously noted, is about average for a business jet. This is impressive when you consider that the five-year span includes the recession, but it is even more remarkable when you match the Challenger’s secondary-market performance against the composite index of the other super midsize jets. The super midsize jets in the composite index are selling at 51 percent of their initial purchase prices. When new five years ago, those aircraft sold for nearly 8 percent more than the Chal-lenger, and they are now selling for 22 percent less than the Challenger. In dollars, the Challenger has lost just $5.9 million in value over the last five years, while the composite-index jets have lost $10.5 million.

In the midsize category, the Citation Sovereign has performed similarly well on the secondary market (see "Citation Sovereign vs. Class Average" graph). The Sovereign is sometimes classified as a super midsize jet, but its price is closer to those of midsize jets.

In 2006, a new Sovereign cost more than any other new midsize jet (about $1.8 million more on average), though over the last five years it has lost less value in terms of percentage and absolute dollars than the composite-index jets. Through the recession, the Sovereign has maintained just under 65 percent of its initial purchase price, while the midsize composite-index jets maintained just under 49 percent. It has lost only $5.7 million in value, versus the $6.9 million lost by the composite-index jets—all of which represent smaller capital investments.

Cessna introduced the Citation Sovereign in 1998, revealing a design that incorporated many fuselage elements from its Citation X and a newly designed wing. The shape of the wing, which features a 16-degree leading-edge sweep and a 12.7-degree sweep at the quarter cord, enables the aircraft to take off from challenging airports such as the one in Aspen, Colo. The wing also helps pro­vide the Sovereign with superior climb and respectable performance at altitude (527 mph maximum speed; about 3,300 land miles maximum range with four passengers). At 25.3 feet long, the Sovereign’s cabin is the longest in the Citation line. It usually accommodates eight or nine passengers, who have 135 cubic feet of storage space for their luggage.

Since beginning deliveries in 2004, Cessna has delivered more than 300 Citations. Any of those Citations that arrive on the secondary market are worth considering, as are Challenger 300s. Their secondary-market prices, evidently a function of their performance numbers, suggest that both are among the best aircraft investments available.

Efficient, Not Indulgent
Jet Advisors conducted a study and discovered that a corporate jet can save each passenger 21 days per year. The corporate jet is an efficiency tool just as an upgraded computer system is.

Anyone who has ever flown on the airlines knows that travelers are often delayed, rerouted, or left stranded by cancelled flights. Delays are inconvenient any time, but they are detrimental to a business when they result in missed deadlines or meetings.

Nevertheless, the corporate jet is criticized for being a luxury. The jet is not the chairman’s chariot, but rather a necessary means of staying in touch with customers and suppliers. Conference calls and videoconferences cannot always replace face-to-face meetings with valued clients or vendors. The corporate jet facilitates additional meeting while eliminating unproductive time spent in airport terminals or on airport runways.

Ultimately a corporate jet is a time machine. The question is whether the annual addition of 21 days of productivity for you and your colleagues or employees is worth the investment.

 

Kevin O’Leary is president and founder of Jet Advisors (www.jetadvisors.com), an independent company that since 2003 has been consulting and representing clients as they purchase or sell private jets or analyze their usage. O’Leary has been working in the private aviation industry since 1996. He has a multi-engine commercial pilot’s license and an MBA and is working toward a PhD in aviation operations.

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