NAFA member, Brian Proctor, President and CEO of Mente Group, looks forward to firmer markets.
AH: How was 2017 for Mente Group and what are your expectations for the year ahead?
BP: That’s a big question! In 2017, last year in February at CJI, we did not know it yet, but the market had already started turning. I think we are now well past the bottom. For example, in terms of units, we see that in the G550 pre-owned market, twelve months ago there were 29 aircraft for sale. As we sit here today at the end of January, there are just 16 pre-owned G550s available for sale. In the Challenger 300 market there were 39 aircraft available, today there are 22. So, we have seen a massive amount of tightening in the pre-owned category. We still haven’t seen a corresponding price increase across the board, though some models are now increasing.
AH: So the falling price of pre-owned aircraft is slowing?
BP: It has flattened, and I believe that the next iteration of aircraft coming onto the pre-owned market will be at a slight premium to today’s asking price. Our estimate is that some time during the third quarter of 2018 we are going to see price increases, assuming that nothing happens to upset the market – no “game changers”!
AH: So, we could be looking at a very fortunate conjunction, with new models coming onto the market from the OEMs at the same time as the pre-owned market is shrinking. That should be good for new purchases since there will be fewer, really attractive, pre-owned alternatives.
BP: The OEMs are probably in a very fortunate position, because the timing of what is happening in the pre-owned market will help them with their new models. However, with most of the new model entrants, the OEMs’ order books have not been as successful so far, as they would have hoped. That said, we are already seeing some people start to shift to new aircraft and that will be great for the OEMs. This is anecdotal, but it is illustrative. We have a client right now who contacted us about buying a pre-owned G280 and that market has just two aircraft available in the world and neither suits his criteria. So, we have shifted to a new search looking at new Challenger 300s and G280s. This is a clear instance of where the OEMs are benefiting from the lack of inventory in the pre-owned market. We are helping him through the comparatives between new and pre-owned. He was looking around the $16 - $17 million ballpark and now that we are a new buyer, we will be somewhere in the $19 - $20 million mark. With that, his out of pocket will be greater, but, with new tax laws in the US, he
should be net-neutral.
AH: What do you think is driving this shift in the market?
BP: I believe there are two components to this. The tax changes in the US are creating a significant amount of free cash flow, and this has happened at a stroke of the pen – plus a lot of lobbying! The President is definitely unlocking things. We are already seeing the implications in the market of more cash being available. And in Europe, we can’t ignore what is going on with the dollar relative to the euro. A $20 million dollar airplane today is 15% cheaper for a European buyer than it was a year ago. Which is nice, obviously. Now there is typically a lag between a price drop and sales. We have done a lot of statistical studies which graph the dollar’s value against a basket of world currencies, versus sales, and the correlation between sales volumes increasing and significant falls in the dollar value are about 80%, which is very strong. As the dollar weakens relative to this basket of currencies, over a period of time we see an influx of new buyers coming in. We are looking to trade that relationship right now. My guess is that around the third quarter of this year, as I said earlier, you will see sales picking up.
AH: You must be loving this, because now, for the first time in a long while, you can say to a prospective buyer, don’t dawdle, the price will go up while you’re dithering.
BP: My first slide in my CJI presentation says: “There has never been a better time to buy”. It is going to get much more expensive, and part of that will be driven by what happens to the dollar. If it drifts to 1.30 euros to the dollar from the current 1.23 euros, that will make the aircraft 10% less expensive for a European buyer. So again, this makes now a great time to buy if you are in Europe. Shifting out of fractional or charter into pre-owned or new today makes a lot more financial sense than it has for a decade.
AH: Is there a rule of thumb for how much disposable net worth you should have in order to buy a jet at a certain price. For example, do you look for someone to have five or ten times the value of the aircraft available to them either as cash or credit?
BP: What makes our firm different is that we do a lot more advisory work than most brokers. So our consulting practice will be engaged to do a feasibility study or a fleet planning study, and during that process we lay out the cost of ownership versus fractional, versus jet cards, versus charter. Very seldom do we ask, what does your cash flow look like, or how much are you worth? The decision is theirs to make when they have all the facts. The thing is, these decisions are very personal. I have a client who is worth more than $10 billion and he refuses to buy an aircraft. I have another client whose net worth is probably under $50 million and he is looking for a Citation to buy. People make value judgments and it is impossible to call. I don’t tell people how to spend their money. We simply frame for them what it is going to cost and then let them make the decision. If I get a sense though that someone is overreaching, going for too big a stretch, I will recommend charter for a few years more. Don’t overspend yourself on an aircraft. Let your business grow a bit more. As my grandmother used to say, “don’t ever buy something that will change your life if you lose it!”
This article was originally published in Business Aviation Magazine, Spring 2018. p. 14.
